Tag Archive for: tax credit

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Distributions Affect Saver’s Tax Credit

“My client wants to claim a Saver’s Tax Credit for 2022 but has taken some distributions in the past. Will those withdrawals affect the amount of credit for which he will qualify?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Rhode Island is representative of a common inquiry regarding available tax credits for personal contributions to eligible plans.

Highlights of Discussion

This is a very important tax question for which your client should seek specific tax advice. Generally, yes, the amount of any contribution eligible for the Saver’s Credit is reduced by certain withdrawals taken for the last three years (See IRS Announcement 2001-106, Q&As 4 and 5). For example, for 2022 tax filings, distributions your client (and his spouse, if filing jointly) took after 2019 and before the due date of their 2022 tax return (including extensions) from the following types of plans will lower the credit amount:

  • Traditional IRAs,
  • Roth IRAs,
  • Achieving a Better Life Experience (ABLE) accounts,
  • 401(k) plans,
  • 403(b) plans,
  • Governmental 457(b) plans,
  • IRS Sec. 501(c)(18)(D) trusts created before June 25, 1959, to pay pension benefits,
  • Qualified plans under IRC Sec. 401(a),
  • Qualified annuities under IRC Sec. 403(a),
  • Simplified Employee Pension (SEP) IRA plans,
  • Savings Incentive Match Plans for Employees (SIMPLE) IRA plans,
  • the Federal Thrift Savings Plan (Federal TSP).

However, they should not count distributions

  • That are not taxable as the result of a rollover or a trustee-to-trustee transfer,
  • That are taxable as the result of an in-plan rollover to a designated Roth account,
  • From an eligible retirement plan (other than a Roth IRA) rolled over or converted to a Roth IRA,
  • That are loans from a qualified employer plan treated as a distribution,
  • Of excess contributions or deferrals (and income allocable to such contributions or deferrals),
  • Of contributions made to an IRA during a tax year and returned (with any income allocable to such contributions) on or before the due date (including extensions) for that tax year,
  • Of dividends paid on stock held by an employee stock ownership plan,
  • From a military retirement plan (other than the Federal TSP) or
  • From an inherited IRA by a nonspousal beneficiary.

Your client and his tax advisor can read details of the credit in IRS Form 8880, Credit for Qualified Retirement Savings Contributions instructions and here Saver’s Credit.

Currently, the credit

  • Equals an amount up to 50%, 20% or 10% of eligible taxpayer contributions capped at $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040SR or 1040N (making the maximum credit $1,000 or $2,000 if married filing jointly);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan (other plans qualify so see full list below); and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • SIMPLE IRA,
  • SARSEP,
  • 403(b),
  • Governmental 457(b),
  • Federal Thrift Savings Plan,
  • ABLE account* or
  • Tax-exempt, union pension benefit plan under IRC Sec. 501(c)(18)(D).

In general, the contribution tax credit is available to individuals who

  1. Are age 18 or older;
  2. Not a full-time student;
  3. Not claimed as a dependent on another person’s return; and
  4. Have income below a certain level (i.e., for 2022 tax filings, the amount on Form 1040, 1040-SR, or 1040-NR, line 11, is $34,000 or less ($51,000 if head of household, or $68,000 if married filing jointly).

2022 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $41,000 AGI not more than $30,750 AGI not more than $20,500
20% of your contribution $41,001- $44,000 $30,751 – $33,000 $20,501 – $22,000
10% of your contribution $44,001 – $68,000 $33,001 – $51,000 $22,001 – $34,000
0% of your contribution more than $68,000 more than $51,000 more than $34,000

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan-related tax credits for which they may qualify. Seeking qualified tax advice is essential to ensure accurate calculations.

 

 

 

 

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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Remember Plan Tax Credits for 2021

“Can you remind me of the special tax credits available for small businesses who set up qualified retirement plans, please?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Arizona is representative of a common inquiry related to incentives for setting up retirement plans.

Highlights of Discussion

My pleasure! Small business owners (with fewer than 100 employees) are eligible for additional tax credits for setting-up retirement plans and/or adding an automatic enrollment feature. The credits are available if the owner establishes a 401(k), a SEP or a SIMPLE IRA plan. The business must

• Have had fewer than 100 employees who received at least $5,000 in compensation for the preceding year;
• Have at least one plan participant who was a nonhighly compensated employee; and
• Not have maintained a plan in the past.

The “Startup Credit” is up to $5,000 (a formula applies), available for the first three years the plan is in existence and offers real benefits to owners by freeing up tax dollars for other important business purposes. The credit was greatly improved as part of the Setting Every Community Up for Retirement Enhancement of 2019 Act (SECURE Act), effective January 1, 2020 (increasing the maximum credit from $500 to $5,000). It is intended to encourage owners to establish retirement plans by helping make the plan more affordable during the startup process. In addition, the owners receive full tax deductions for all contributions made to the plan.

On top of that, if an owner elects to add an automatic enrollment feature to the plan, an additional $500 credit (for the first three years) is also available. The automatic enrollment feature calls for newly eligible participants to be enrolled automatically in the plan with a specified default deferral rate. The IRS provides additional details about the startup and auto deferral credits here.

Eligible businesses may claim the credit using Form 8881, Credit for Small Employer Pension Plan Startup Costs.

See the Instructions for Form 8881 for more details.

Conclusion
Tax credits for setting up a plan and having an automatic enrollment feature are great tools to help small businesses defray the initial costs of starting and maintaining a plan. Business owners should discuss the credits with their accountants and advisors to determine if it makes sense for them to establish a plan.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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Boost to Plan Start Up Tax Credit

“Can you explain the recent changes to the tax credit for employers that start new retirement plans?”   

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to tax credits for starting retirement plans.   

Highlights of the Discussion

The Further Consolidated Appropriations Act, 2020 included a provision from the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) that modifies the amount of tax credit a small employer may receive for qualified costs incurred as a result of setting up a new retirement plan for 2020 and later years. Eligible employers (defined later) may be able to qualify for up to a $5,000 tax credit (previously up to $500) for each of the first three years of a plan’s existence.

An eligible employer[1] is one that

  • Had 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
  • Had at least one plan participant who was a nonhighly compensated employee; and
  • In the three tax years before the first year the business is eligible for the credit, the employees were not substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer, a member of a controlled group, or a predecessor.

The new law increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of 1. or 2. below:

  1. $500 OR
  2. The lesser of
  • $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan OR
  • $5,000.

As a result, for each of the first three years, the credit could be at least $500 and up to $5,000, depending on the number of nonhighly compensated employees covered by the plan. Employers claim the credit using. Form 8881, Credit for Small Employer Pension Plan Startup Costs (to be updated for the increased credit amount).

The term qualified startup costs means any ordinary and necessary expenses of an eligible employer which are paid or incurred in connection with the

  1. Establishment or administration of an eligible employer plan, or
  2. Retirement-related education of employees with respect to such plan.

Eligible plans include an IRC Sec. 401(a) qualified plan, a 403(a) annuity plan, a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

The law also creates a separate, new tax credit for the first three years of up to $500 for small employers that add an automatic enrollment feature to a 401(k) or SIMPLE IRA plan.

Conclusion

For 2020 and later years, the incentive for small businesses to establish new retirement plans for their workers has become more lucrative from a tax perspective.

[1] IRC Sec. 45E

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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Retirement Savings Tax Credit

“What contributions are eligible for the retirement savings tax credit?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.

Highlights of Discussion

IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040A or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP) IRA,
  • 403(b) or
  • Governmental 457(b) plan.

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level.

2018 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,000 AGI not more than $28,500 AGI not more than $19,000
20% of your contribution $38,001 – $41,000 $28,501 – $30,750 $19,001 – $20,500
10% of your contribution $41,001 – $63,000 $30,751 – $47,250 $20,501 – $31,500

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan related tax credits for which they may qualify.

© Copyright 2024 Retirement Learning Center, all rights reserved