Would you like to shave $1,000 off your income tax bill? Would your spouse like to join in the tax savings of up to $2,000 on a joint return? This potential savings comes in the form of a tax credit called the “retirement savings contributions credit” or “saver’s credit.” Unlike a tax deduction, a tax credit is a dollar for dollar reduction of the taxes you owe.

How do you qualify for this credit? By contributing to a retirement plan, you could be eligible for the saver’s credit. This includes contributions to both Roth and traditional IRAs. It also includes salary deferrals into SEP, SIMPLE, 401(k), 403(b), and 457 plans.

How much is the credit? The credit ranges from 10 percent to 50 percent of the first $2,000 contributed to a retirement plan. In other words, the maximum credit is $1,000 for an individual.If you and your spouse both contribute at least $2,000 to your retirement accounts, you could qualify for up to a $2,000 credit on a joint return.

Are there limitations? Like many tax breaks, this credit decreases or phases out entirely once your income reaches certain levels. The 2007 income phase-out range is $15,500 to $26,000 for individuals, $23,250 to $39,000 for heads of household, and $31,000 to $52,000 for married couples filing a joint return. (Income limits are adjusted annually for inflation.) In addition, you cannot take the credit if you are under age 18, a full-time student, or someone else’s dependent.

Here’s an example. Say you put $3,000 into an IRA and you qualify for the maximum $1,000 saver’s credit. You can deduct your $3,000 contribution for a tax savings of $450 ($3,000 x 15% tax rate). Add this $450 tax savings to the $1,000 saver’s credit, and your total tax savings equals $1,450. That’s the equivalent of earning 48% on your $3,000 investment in one year.

If you haven’t been contributing to a retirement plan, this tax credit adds yet another incentive to do so. You have until April 15, 2008, to make a 2007 IRA contribution that could reduce your 2007 taxes.



David Compton is a Certified Public Accountant with offices in Meridian and

Birmingham, Ala.