13th annual Municipal Finance Conference


13th annual Municipal Finance Conference


The Saver’s Credit

June 9, 2003

The 2001 tax act created a “saver ‘s credit” that provides
saving incentives for households with moderate
income. The saver ‘s credit provides a matching tax
credit for contributions made to IRAs and 401(k) plans.
The eligible contributions are limited to $2,000. Joint
filers with income of $30,000 or less, and single filers
with income of $15,000 or less, are eligible for a maximum
50 percent tax credit. (A 50 percent tax credit is
the equivalent of a 100 percent match on an after-tax

The credit is not refundable. Therefore, despite the
apparent generosity of the 50 percent credit rate, it does
not result in any additional incentive to save for many
tax-filing units in the relevant income range. The table
shows that 57 million returns have incomes low
enough to qualify for the 50 percent credit. Only one-fifth
of these returns, however, could benefit from the
credit if they contributed to an IRA or 401(k) because
the credit is nonrefundable. Only 64,000 (or slightly
more than 1 out of every 1,000) of the returns that
qualify based on income could receive the maximum
possible credit ($1,000 per person) if they made the
maximum eligible contribution.

For filers with higher incomes, the credit phases
down quickly to 20 percent and then 10 percent before
being eliminated at $50,000 in income for joint filers
(and $25,000 for single filers). The result of the steep
declines in the credit rate can be massive marginal tax
rates for savers. For example, consider a married
couple with income of $30,000 in 2003 and no children.
Assume the couple claims the standard deduction
and one spouse makes a $2,000 contribution.
After the saver ‘s credit, the couple’s income tax
liability would be about $700. If one spouse earned
an extra dollar, however, the couple’s income tax
liability after the credit would increase to about $1,300—an increase in taxes of about $600 for an increase in
income of $1.