US House Pension Bill Will Erode Saver's Tax Credit

The CBPP argues that the House bill does not index the credit’s features for inflation, meaning, over time, fewer and fewer families will have incomes in the range within which the credit applies.   The income levels above which people are ineligible for the credit would be permanently frozen, without any adjustment for inflation, but the income levels below which tax filers are ineligible because they do not earn enough to owe income tax are adjusted for inflation and consequently rise over time, according to the CBPP.

The Center further argues that, for those who would remain eligible for the credit, inflation would sharply erode its value.   The principal reason that this lack of indexing has such an effect on the credit is that the 50% “credit rate” phases down sharply after a family’s income surpasses $30,000.  The credit rate is only 10% for couples with income between $32,500 and $50,000.

Furthermore, the CBPP says, with each passing year, fewer and fewer families will be eligible for the saver’s credit at all.  The credit is not refundable, so families that do not earn enough to incur income tax liabilities cannot use it.  The income levels at which families begin to owe federal income tax are adjusted each year for inflation and so rise over time, the Center points out.  As a result, each year fewer families will have incomes that are above the point where they owe income tax but below the $50,000 income limit for the credit.  As the income range for eligibility narrows, the number of potential beneficiaries declines.

Under the saver’s credit, enacted in 2001, married couples with incomes below $50,000, and individuals with incomes below $25,000, are eligible to receive a tax credit of up to 50% of contributions (up to $2,000) that they make during the year to employer-sponsored retirement plans or IRAs.   The act also raises contribution limits for IRAs and 401(k)’s.

Because the contribution limits are adjusted for inflation each year, and the House bill makes this provision permanent, the Center argues that the bill would permanently protect from inflation all of the retirement-related tax cuts for high-income taxpayers.   The bill’s shortcomings, though, would deplete tax benefits for those who most need help saving for retirement.