IRS Offers a Second 401 (k) Tax Shelter

As explained elsewhere in this edition of Hotel Voice, a 401 (k) plan is an advantage for workers because the money they contribute each week is deducted from their paychecks without being taxed. Another advantage is that the money that is invested in a 401 (k) plan account is allowed to grow free of taxation. But did you know that the government offers low and middle-income workers still another tax shelter for investing in 401 (k) plans? It is called a saver’s tax credit, and there may be more than a few members of our Union who are eligible to use it.

When workers defer a portion of their income into a 401 (k) plan, they reduce the amount of their income that is subject to federal and New York State income taxes. But with the saver’s tax credit, many low and middle-income wage earners who invest in a 401 (k) plan can also reduce their taxes even further, up to a maximum of $1,000.

The saver’s tax credit is available to married couples who file jointly and who participate in a 401 (k) plan through their paychecks, if their adjusted gross income is less than $59,000 a year. The saver’s tax credit is available to single workers or married workers who file separately and who participate in a 401 (k) plan through their paychecks, if their adjusted gross income is less than $29,500 a year. The adjusted gross income limit for those who are single and heads of households is $44,250, if they participate in a 401 (k) plan through their paychecks.

With the saver’s tax credit a low or middle-income couple filing a joint return could be eligible for a tax credit of up to $1,000 each if both contribute $2,000 or more to a 401 (k) plan. Most important of all is to remember that unlike a tax deduction a tax credit actually reduces your taxes dollar for dollar. You can even get money back from the government in the event you don’t owe any taxes!

While many of our members will not qualify for the saver’s tax credit because they earn too much money, we do believe that there are many members, especially part-time workers, who will qualify for this tax break if they have 401 (k) plans. Remember, the income limits under this incentive are based on adjusted gross income, not what workers actually earn.

We hope this information is helpful to all members who invest in the Union’s 401 (k) plan or are thinking about it. And for those workers who earn too much money to qualify for the saver’s tax credit there’s only one thing we can add: There are still enough reasons to invest in 401 (k) plans even without the saver’s tax credit, and the current Hotel Trades Council Enrollment period is taking place between now and June 13.