Saver Credit Changes Under the EARN Bill

The savings credit helps low- and middle-income Americans who contribute to a retirement plan by reducing up to $1,000 ($2,000 for married couples) from their tax bill when they file their income tax return. annual income. It is also a particularly interesting incentive to encourage young people to start saving early for their golden years.

But the Crédit d’Épargnant as it exists today could experience significant changes, particularly with regard to its mode of payment. The EARN Act, which was recently introduced in the US Senate, would essentially convert the credit into a government matching program for retirement plan contributions. Other revisions would also be made. If passed, the new rules will come into force in 2027.

While it’s too early to tell whether the proposed changes will eventually become law, there is bipartisan support for major improvements to current retirement savings plans and incentives. So depending on how the policy plays out, there’s a good chance we’ll see improvements to saver credit in one form or another in the near future – and it could very well be the changes included in the EARN law.

The credit of the current saver

Currently, qualified taxpayers who contribute to a retirement plan (for example, a 401(k), traditional IRA, or Roth IRA) can claim the saver’s credit on their tax return. For 2022, single and married couples who file a separate return and whose adjusted gross income is $34,000 or less are eligible for the credit. Married individuals filing a joint tax return must have an AGI of $68,000 or less, while heads of household filers must have an AGI of $51,000 or less to qualify. However, even if your income is below the applicable limit, you will not be eligible for the credit if you are under 18, a full-time student, or can be claimed as a dependent on your tax return. from someone else.

If you meet the eligibility requirements, the credit amount is 10%, 20%, or 50% of the first $2,000 ($4,000 for co-filers) you contribute to retirement accounts. The percentage used is based on your income and deposit status. The credit is a “non-refundable” credit, meaning it cannot be more than your tax payable before the credit is applied (so your credit could be reduced if your tax bill is low).

Contributions to an ABLE account are also eligible for Saver Credit if they come from the designated beneficiary (although this rule expires after 2026).

For more information on the current credit, see Savings Credit: Retirement Tax Relief for the Middle Class.

EARN Act changes saver credit

The EARN Act would make a number of significant revisions to saver credit from 2027. First, it would change the way you get credit. Instead of having the credit applied against your tax liability when you file your tax return, the credit amount would actually be deposited directly into your retirement account. You would have the right to choose which retirement account it goes into, but it could not go into a Roth account. If your credit is less than $100, you can still apply it to your tax payable instead of depositing it in a retirement account. Also, the amount deposited into your account would not count towards your annual contribution limit. The hope is that this change would make it easier to save for retirement by automatically putting more money into retirement accounts.

The credit would also become a refundable credit under the EARN Act. This way, you would not lose part of your credit if your tax payable was less than the amount of the credit.

Elimination ranges would also be adjusted and extended. This would allow more people to claim the saver’s credit. For single filers and married filers filing separately, the credit would be phased out to zero if the modified AGI is $20,500 to $35,500. Joint filers would see their credit reduced if their modified AGI is between $41,000 and $71,000, and head of household filers would see a reduction if their modified AGI is between $30,750 and $53,250. These numbers would be adjusted annually for inflation starting in 2028 (with current elimination ranges being adjusted annually). Allowable deductions and exclusions for any contribution to retirement savings during the year would not be included in the amended AGI (this would be a new provision).

Eligibility for savings credit would also be affected. Under the EARN Act, non-resident aliens would not qualify unless they are treated as US residents for the tax year. Generally, a “non-resident alien” is not a US citizen, does not have a green card, and is not physically present in the United States for the required length of time.

Savings credit payments made under the EARN Act would not be subject to reduction or set-off to pay child support, federal taxes, state income taxes, debts owed to agencies federal or unemployment compensation debts.

If the IRS deposits money into your retirement account in error, the erroneous payment will be treated as an underpayment of tax that you must repay. However, if you withdraw money from the account in a timely manner, you will not be affected by the 10% penalty for early withdrawals from a retirement account (i.e. for withdrawing money before the age of 59 and a half).

EARN Act’s Path to Passage

Important legislation on retirement savings was passed in 2019 with the SECURE law. However, since then, several key lawmakers on both sides of the congressional aisle have not been satisfied. As a result, there has been a push this year to get another bill through the president’s office that will make it easier for people to build a nest egg for retirement.

Earlier this year, the US House of Representatives passed the SECURE Act 2.0, which is another important piece of legislation dealing with retirement savings issues. This legislation would also impact saver credit by applying a single credit percentage (50%) at all levels, but it would also make credit available to fewer people.

Obviously, the SECURE Act 2.0 and the EARN Act will not pass Congress. So lawmakers still have a lot of work to do before major retirement legislation can be passed. But many experts believe a major retirement bill will soon be enacted – possibly by the end of the year. However, if these experts are right, we don’t yet know if it will be the EARN Act, the SECURE 2.0 Act, or perhaps a combination of the two that will make it to the finish line.