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Some taxpayers can save even more on their taxes

Many employees may not be aware of a special gift Uncle Sam offers individuals who save for retirement. Tax-sheltered contributions made to a 403(b) or 401(k) plan not only reduce an employee’s taxable income, but these contributions, in addition to Roth elective deferrals and after-tax contributions, may also qualify the employee for a tax credit from the U.S. government. A tax credit is one of the fastest ways to lower taxes since every dollar of credit will reduce the federal income tax an employee owes by a dollar.

By making contributions to a 403(b), 401(k), traditional or Roth IRA, an employee may qualify for the Saver’s Credit. The Saver’s Credit is a federal tax credit of up to $1,000 (up to $2,000 if married and filing jointly). The maximum annual contribution eligible for the Saver’s Credit is $2,000. This tax credit varies based on the employee's income level (Adjusted Gross Income) and filing status, as indicated on the chart below:

Saver’s Credit

Filing Status Adjusted Gross Income
Married Filing Jointly $0 - $31,000 $31,001 -$34,000 $34,001 -$52,000 Over $52,000
Head of Household $0 - $23,500 $23,501 -$25,500 $25,501 -$39,000 Over $39,000
Single & Married Filing Separately $0 - $15,500 $15,501 -$17,000 $17,001 -$26,000 Over $26,000
Tax Credit Rate
(based on percentage of contribution)
50% 20% 10% 0%

Example 1

A single employee has an Adjusted Gross Income of $25,000 and contributes $2,000 into her 403(b) plan. She may be eligible for a $200 tax credit (10% of $2,000), depending on the total of her other tax credits.

Special note for ministers — A minister’s Adjusted Gross Income does not include the amount designated as a minister’s housing allowance. As a result, many ministers may be eligible for the Saver’s Credit and not know it.

Example 2

A married minister, filing a joint return and claiming a minister’s housing allowance of $15,000, has an Adjusted Gross Income of $29,500 and contributes $3,000 into his 403(b) plan. He may be eligible for a $1,000 tax credit (50% of $2,000), depending on the total of his other tax credits.

For more information, see IRS publication 590.

This article is not intended as a substitute for legal, accounting or professional advice. If legal, tax or other expert assistance is required, the services of a competent professional should be sought.