February 27, 2003

 

Save for Retirement and Reduce Your Income Taxes

Congress implemented the Saver’s Tax Credit in 2001 to prompt workers to make contributions to a retirement plan or Individual Retirement Account. The new tax credit has the potential to significantly reduce workers’ income taxes, according to Debra Pankow, North Dakota State University extension family economics specialist.

Saver’s Tax Credit allows workers to receive a tax credit of up to 50 percent of a maximum $2000 contribution to a retirement plan or IRA. Married workers may each make the maximum contribution. This new option is documented as the "Credit for Qualified Retirement Savings Contributions" on IRS tax forms, and is in effect for contributions made during 2002.

Saver’s Tax Credit will reduce or eliminate a worker’s income tax, but workers who do not owe any income cannot benefit. Yet, some low- and moderate-income workers may see increased returns from the Earned Income Credit and the new Child Tax Credit if they contribute to a retirement account. The following points explain how:

• "Beginning in 2002, non-taxable earned income will no longer be counted in figuring the EIC. Most EIC claimants who also make contributions for retirement through pre-tax salary reductions are in the phase-down range of the EIC, where EIC amounts decrease as taxable income increases. Therefore, since the salary reductions for retirement reduce the worker’s taxable income, the worker will qualify for a larger EIC."
• "The Saver’s Tax Credit reduces or eliminates the income tax a worker may owe. If that worker also qualifies for the new Child Tax Credit, less of that credit will need to go toward reducing income tax liability and more will be available for a refund to the worker."

Best of all – it’s not too late to take advantage of the Saver’s Tax Credit. Workers have until April 15 to make contributions to an IRA for the 2002 tax year. For more information about the Saver’s Tax Credit, contact the Internal Revenue Service at 1-800-829-1040.

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Source: Debra Pankow, (701) 231_8593, dpankow@ndsuext.nodak.edu
Writer: Teresa Oe, (701) 231_8371, teresa.oe@ndsu.nodak.edu
Editor: Rich Mattern, (701) 231_6136, richard.mattern@ndsu.nodak.edu