Enhancements To Saver’s Tax Credit Could Help Americans Save For Retirement
Praising the “saver’s credit,” enacted in 2001 to encourage low- and moderate-income Americans to save for retirement, a white paper published by the AARP Public Policy Institute called upon Congress to expand and improve the credit so that it is used more widely by the target group.
Written by researchers Lisa Southworth and John Gist, the paper, “The Saver’s Credit: What Does It Do For Saving?” looked at the history of the saver’s credit and the options for promoting its use. Officially referred to as the “Retirement Savings Contribution Credit,” the credit was introduced in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 and made permanent by the Pension Protection Act of 2006. The credit allows taxpayers with low and moderate incomes to reduce their federal income tax liability by making eligible contributions to a retirement or savings plan, and to receive a non-refundable credit against their federal income tax.
Filers who meet the income criteria can claim the credit on the first $2,000 ($4,000 for married couples) of eligible contributions to a retirement account in a given tax year. The credit rate ranges from 50% for taxpayers with very low adjusted gross incomes (up to $16,000 for single filers and $32,000 for married couples filing jointly in 2008), 20% for taxpayers with slightly higher incomes, (up to $17,250 for singles and up to $34,500 for married couples in 2008), and 10% for those with moderate incomes (up to $26,500 for singles and up to $53,000 for married couples in 2008).
The saver’s credit has been useful in helping to offset the primary structure of retirement tax savings incentives, which provides the largest subsidies to affluent taxpayers with the highest tax liabilities, the authors said. However, they added, the saver’s credit in its current form has several limitations that make it less attractive to lower-income filers, especially those who also claim the child tax credit.
The report noted that, in 2002, the first year it was available, only 8.5 million of the 28 million taxpayers in the income groups eligible to receive the credit contributed to a qualifying retirement account. Of these 8.5 million taxpayers, 5.3 million actually claimed the saver’s credit, and 3.6 million of this group claimed the lowest credit of 10%. Of those filers whose income was low enough to qualify for the 50% credit rate, nearly 43% did not have an income tax liability high enough to claim the full credit for which they were eligible. In short, the study found, the saver’s credit appears to be underutilized since only 30% of those Americans eligible to claim it make savings contributions, and only 60% of those actually claim the credit.
To improve the effectiveness of the saver’s credit, Southworth and Gist recommended that Congress consider making the credit refundable for filers who do not have positive income tax liabilities or whose liabilities are too small to allow them to take full advantage of the credit. The authors also suggested that lawmakers consider better coordinating the saver’s credit with the partially refundable child tax credit, which can crowd out the saver’s credit in some cases. Finally, researchers asked Congress to consider expanding eligibility by changing the credit rates and income thresholds, and by smoothing the credit rate drops.
