Retirement Savings Contributions Credit

Eligible low-income taxpayers may claim a nonrefundable credit for contributions to elective deferral plans or individual retirement accounts (IRAs) (Code Sec. 25B).  This credit is commonly referred to as the “retirement savings contributions credit” and has also been referred to as the “saver’s credit.”  The credit amount equals the eligible taxpayer’s applicable percentage, determined by filing status and adjusted gross income (AGI), multiplied by the total qualified retirement savings contributions (not to exceed $2,000) for the tax year.  The maximum credit amount is $1,000.  The credit is in addition to the exclusion or deduction from gross income for making elective deferrals and IRA contributions that are otherwise allowed.

Eligibility. To be eligible for the credit, a taxpayer making a contribution to a qualified retirement savings plan must be at least 18 years of age at the close of the tax year, must not be claimed as a dependent by someone else, and must not be a full-time student.  A qualified retirement savings plan contribution is the sum of:

·        Contributions to a traditional or Roth IRA (other than rollover contributions);

·        Any elective deferrals of compensation to a 401(k), 403(b), tax-sheltered annuity, or SIMPLE or SEP plan.

·        Any elective deferrals of compensation to a Code Sec. 457(b) plan of a state of local government or tax exempt organization; and

·        Any voluntary employee contributions to any qualified retirement plan.

Claiming the Credit. Form 8880 is used to calculate the amount of the credit, which is then reported on Form 1040.  For 2011, the credit is phased out when AGI exceeds $56,500 for joint return filers, $42,375 for heads of households, and $28,250 for single and married filing separately.  The applicable percentage is the percentage as determined by the inflation adjusted income ranges for 2011 in the following table:

AGI Joint Return Applicable Percentages Over Not Over 0  $  34,000 50%  $   34,000  $  36,500 20%  $   36,500  $  56,500 10%  $   56,500 -------- 0% Head of Household Applicable Percentages Over Not Over 0  $  25,500 50%  $   25,500  $  27,375 20%  $   27,375  $  42,375 10%  $   42,375 -------- 0% All other cases Applicable Percentages Over Not Over 0  $  17,000 50%  $   17,000  $  18,250 20%  $   18,250  $  28,250 10%  $   28,250 -------- 0%

For Example: if your AGI is $30,000, you contribute $2,000 into a Roth IRA, your 18, and not a dependent on someone else’s tax return; you will get a credit of $1,000. 

This information was quoted from the book “U.S. Master Tax Guide.”