Wipfli Alerts & Updates: Help Your Employees Take Advantage of the Saver's Credit

A Form 8880 is used to claim the saver’s credit on an individual’s personal tax return, and its instructions have details on calculating the credit correctly. A taxpayer’s credit amount is based on a number of factors, including their filing status, adjusted gross income, tax liability, and the amount contributed to qualifying retirement programs. The saver’s credit can increase a taxpayer’s refund or reduce the amount of tax owed. Though the maximum saver’s credit is $1,000 for singles and $2,000 for married couples, we caution that the credit is oftentimes much less than these maximum amounts. In addition, some taxpayers may not realize any benefits so it is important to understand the calculation of the credit. We would encourage taxpayers to complete the form to determine what benefits they will realize. Other special rules to the saver’s credit may apply. 

The saver’s credit began in 2002 as a temporary provision. It was made permanent under the Pension Protection Act of 2006 (PPA). To keep pace with inflation, income limits are now adjusted annually.

The Payroll Tax Holiday versus Making Work Pay Credit 
As background, the “Making Work Pay Credit” provided a refundable tax credit equal to a flat $400 for individual taxpayers and $800 for married taxpayers. This credit expired in 2010. In 2011, the Making Work Pay Credit was replaced by a Temporary Payroll Tax Cut known as the Payroll Tax Holiday which is based on a percentage of income rather than the previous flat credit. Even though some employees may have been better off with the Making Work Pay Credit (break even wage was $20,000; 2% of $20,000 = $400) they should have noticed a few extra dollars in their paychecks during 2011. The Payroll Tax Holiday was set to expire on December 31, 2011. 

On December 23, 2011, President Obama signed into law a short-term extension of the social security tax cut. The Tax Holiday was extended through February 29, 2012. American workers will continue to pay only 4.2% of their wages into Social Security vs. the normal rate of 6.2%. While a long-term fix is not evident, it is hopeful this tax cut will be extended through the end of 2012. This 2% reduction applies to the employee, whether they receive wages or are self-employed. The 2% reduction does not apply to the employer portion of FICA. 

It is important to note the extension law includes a recapture provision, which applies to individuals who earn more than $18,350 during the 2-month extension period. The recapture tax would be payable in 2013 when the employee files their income tax return for the 2012 tax year. The recapture provision will only apply if the Payroll Tax Holiday is not extended for the remainder of 2012.  

Employers should implement the reduced payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. The IRS advised, if there is any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employee’s pay as soon as possible, but no later than March 31, 2012.