IRS offers different tax credits for all kinds of programs. This tax blog will center around the tax credit and retirement savings.
Tax Credits for Retirement Savings
Eligible Contributions
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you can be eligible for a tax credit, depending on your age and income.
The Savers Credit:
1. Income limits.
The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:
a. Single, married filing separately, or qualifying widow(er), with income up to $28,250
b. Head of Household with income up to $42,375
c. Married Filing Jointly, with incomes up to $56,500
2. Eligibility requirements for Savers Credit.
To be eligible for the credit you must be at least 18 years of age and you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return. IRS will cross check tax returns for possible audits, so be careful.
3. Credit amount for the Savers Credit.
If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions.
When figuring this credit, you must subtract distributions you received from your retirement plans from the contributions you made.
This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date including extensions for filing the return for the credit year.
5. Other tax benefits.
The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms.
To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
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