Warning: getimagesize(): Filename cannot be empty in /home/blackenterprise/public_html/wp-content/themes/blackenterprise/single-standard.php on line 35
Alvia Alexander is determined to provide a bright future for her 5-year-old son, Carlton. At the top of her list is making sure that in another 12 years or so Carlton has the means to attend the college of his choice. And while she tries to meet her son’s financial needs, Alexander, 26, has not lost sight of her own goals. She has made achieving retirement security a top priority.
Although she earns a modest annual salary of $25,000 as an investigative clerk for the Internal Revenue Service, Alexander makes a biweekly investment of $25 into her retirement fund 401(k) and another $40 into a Thrift Savings Plan. The federal government matches her Thrift Savings Plan contributions dollar-for-dollar. Over the last three years, however, those investments could have worked harder for Alexander if she had taken advantage of a section of the tax code that was unknown to her and many others — the Saver’s Tax Credit. “I’ve never heard of the program and haven’t taken advantage of it,” says Alexander. “I feel it should have been advertised more because everyone needs all of the tax breaks that they can get.”
So how can you benefit from the Saver’s Tax Credit? Eligible taxpayers who invest in retirement plans, including vehicles such as their 401(k), 403(b) and IRAs, receive a nonrefundable tax credit, ranging from 10% to 50% of contributions up to $2,000 (see chart). Moreover, the credit can be used to offset any income taxes owed. There are restrictions though: Taxpayers’ income must not exceed $50,000 for married couples who file jointly, $37,500 for heads of household, and $25,000 for other filers. “It is a significant provision of the tax code that attempts to level the playing field for savings for people of moderate income. Many incentives for people to save [on taxes] target high-income individuals,” says J. Mark Iwry, a former Treasury Department official who was critical in developing the measure from 1999 to 2001. “The Saver’s Tax Credit seeks to correct this by rewarding people not in proportion to their earnings, but what they save.”
Soon it may be too late for Alexander and millions of taxpayers to gain such benefits. In effect since 2002, the credit is set to expire Dec. 31. In 2002 and 2003, 5.4 million tax filers claimed this credit, with the majority only eligible for the 10% to 20% credit because of income limitations. “I expect the credit will be renewed because there is widespread recognition in Congress that moderate-income people will have incentive to save,” says Iwry, who is currently a senior fellow at the Brookings Institution, a Washington, D.C., research organization. “They could make it permanent or could extend it another five years. The [House] Ways and Means Committee voted in November 2005 to make it permanent. This paves the way for the House and Senate to pass the legislation and for the president to sign it.”
The credit was initially enacted because tax incentives in excess of $125 billion annually benefited more affluent individuals.