Saver's Credit/Sample Employee Notice - what does the first example me

[Guest gaham]

Has anyone had a chance to look at the sample employee notice for the new EGTRRA saver's credit for contributions to a 401(k) or IRA (IRS Announcement 2001-106)? Is it just me or is the first example that they use totally incomprehensible? If anyone has deciphered it, I would appreciate any help. Thanks.

[Tom Poje]

you are not alone. I even printed off the tax form and was confused how it really works. oh well.

[Archimage]

I think I have a pretty good understanding of the example. Let me know what your having trouble understanding and I will see if can help.

[Guest dmj1998]

:confused:

where does the extra $600 tax credit come from?

in the example, the couple's income level qualifies them for a credit of 50% of their contribution ($4000). If that is $2000 and their original tax bill was $3000, how does is end up being $400?

[MGB]

I do not have the example in front of me (it is under one of these stacks), but I can "guess":

They are in the 15% tax bracket and otherwise would owe $3000 in taxes. They contribute $4000 and get a $2000 tax credit. However, they have also done it on a pre-tax basis, reducing their taxable income. That reduction saves 15%*$4000=$600 in taxes.

3000-2000-600=400

[Dave Baker]

BTW, Announcement 2001-106 is online at

http://www.benefitslink.com/IRS/ann2001-106.shtml

[Guest beppie_stark]

MGB has the math right. I think, however, that a major point of the example gets lost in all the numbers: the credit % is based on AGI and AGI is reduced by pretax deferals. So even though the couple in the example has $34,000 in gross income, they are eligible for the 50% credit.

[Guest gaham]

Beth, I believe your right that the agi that is used is after the contributions and I believe that MGB is right in his calculations. The problem is that this is not explained either in the example or in the rest of the notice. Readers have to figure it out for themselves. I suppose that the point of the example is to simply show the dramatic tax savings that can occur with the credit--going through the calculation would only confuse. But failure to explain sure confused me and I'm afraid will confuse others.

[Archimage]

I agree that the sample can be confusing to those that are not familiar with tax law. What I did is rewrote the example to be a little more reader friendly.

[Dave Baker]

Could you share it with us (cut and paste into a reply in this thread)?

[Archimage]

As soon as I find it, I will post it for everyone.

[Archimage]

Okay everyone. Here you go. It is in a trifold format. Hope this helps out.

[Guest dmj1998]

now i get it. nice work, Archimage!

[Guest gaham]

Thanks, Archimage. This is very helpful.

[MWeddell]

When I sent this to a client, I added the following at the end of the first example in the IRS notice: "(The $2,600 savings is due to a $2000 tax credit (50% of $4,000) and $600 due to lower taxable compensation ($4000 X 15% tax rate).)"

[Guest ctwmn]

I work for H&R Block and was doing some research on the savers credit when I stumbled onto this board...so I'm just visiting and I'm intrigued by some of your questions. They're providing me great research material, and maybe I can get some answers for some of you in the next day or two. I know this is an old thread, but it's still a great learning tool for me.

I am only a first-year preparer, and I'm definitely no expert on the savers credit, yet, but we just watched a very good training video at our Block office about this credit. Some of Block's more advanced preparers will have a better understanding of this credit, and if you still have questions, you may want to contact your local Block office.

I do know this: The saver's credit is only going to be around until 2006, then it's outta here (at least that's what the IRS is saying at this time). From a benefits standpoint, Section 125 Plan Contributions (Flexible Spending plans) lower the AGI for the Saver's credit, allowing taxpayers to qualify for a bigger credit. Also, I think there are some special rules about how certain income and deductions do not apply to AGI when speaking in terms of the savers credit, but I'm not sure quite how that works, yet - but I'm working on it. The other nice thing about the saver's credit is that it boosts a taxpayer's EIC and Child tax credits, effectively providing them a larger refund. Combined with the new EIC rules this year, some taxpayers are going to see some surprisingly large refunds. This all means that some taxpayers can open up an IRA with $1000, and only lose $140 of their larger-than-last-year refund in doing so. Of course, this all depends on several factors in their tax situation. In the next couple of years, people are really going to learn how to work this credit to their advantage.

You all probably knew this already, but, like I said, I'm stumbling through and was excited that I've actually learned something. This savers credit IS still pretty confusing even one year after this thread started.