For most tax-related issues, the IRS functions on a calendar-year basis. For example, all of your income made between January 1 and December 31 is taxable. If you have a child on January 1 of next year… that child tax credit isn’t available until next year. However, there are a few cases in which the IRS gives you a little wiggle room – and retirement savings is one of them.

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2007 and the years ahead, with the use of a “saver’s credit.” Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted last year. But now, to help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Formally known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Now that a growing number of employers are automatically enrolling their employees in 401(k) plans, the saver’s credit offers many people who save for retirement an added bonus.

But the best part? Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2007 tax return. People have until April 15, 2008, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2007. However, elective deferrals (those automatic withdrawals from your paycheck) must be made by the end of the year to a 401(k) plan or similar workplace program. If you’re unable to set aside money for this year, you should schedule your 2008 contributions soon so your employer can begin withholding them in January.

The following people can claim the saver’s credit:

• Married couples filing jointly with incomes up to $52,000 in 2007 or $53,000 in 2008;
• Heads of Household with incomes up to $39,000 in 2007 or $39,750 in 2008; and
• Married individuals filing separately and singles with incomes up to $26,000 in 2007 or $26,500 in 2008.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, or $2,000 for married couples, you should know that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

So be sure and set up a retirement account if you haven’t done so already! There’s nothing like saving for retirement to keep money away form Uncle Sam.

As if you needed another reason to start a 401k, I’ve got another one for you. Just recently, my employer did something I wish others would – after 1 year of employment (when the company begins matching your contributions), you are automatically enrolled into the company’s 401k program. You can opt out, of course, but by default all new employees are enrolled.

And after seeing my first paycheck after enrollment, I have come up with one more reason why enrolling in a 401k plan is a good idea: forced savings.

To be honest, it’s hard for me (and many of you I imagine) to write a check for $500 each month to a bank or broker to put towards your retirement. But if you never had that $500 to begin with, because it was automatically withdrawn, then you wouldn’t feel the “pain” of writing that check.

And sure it hurts during the first month or two every time you look at your smaller paycheck; but after a while, you will forget about it – just like you forgot about your healthcare deductions, life insurance deductions, etc. You and your monthly budget will adjust, and you’ll be on your way to saving for retirement.

And, if I can throw one more word of advice in regarding retirement savings, I recommend putting most, if not all, of your annual raise right back into your retirement fund. If you’re contributing 6% now, and you get a 8% raise come Christmas, then keep 3-5% to keep up with increased living expenses (like rent), and then increase your contribution percentage to 9-11%. If you can keep that up you’ll continue to live within your means while building quite a nest egg.