Retirement Savings Contribution Income Tax Credit of up to $2,000
When you file this year’s 1040 income tax return you may be entitled to obtain an income tax credit of up to $1,000 (up to $2,000 if filing jointly) if you make an eligible contribution to an employer sponsored retirement plan or an Individual Retirement Account. This credit is a nonrefundable tax credit. A nonrefundable credit cannot be greater than the amount of your tax liability. This credit is in addition to any IRA contribution or contributions that you may make to a qualified plan
Where to Find the Credit – The credit is calculated based on your adjusted gross income and the your filing status. The IRS issued a tax table that indicates applicable percentages ranging from 10% to 50% to for the amount of the credit.
Eligibility To obtain this credit, the following conditions must be met:(1) You must have made a contribution to an IRA or qualified retirement savings plan. (2)You must be at least 18 years old as of December 31, 2009. (3) You cannot be claimed as a dependent by another person. (4)You cannot be a full-time student. (5) You had to be born before January 2, 1992. (6) Your adjusted gross income cannot be greater than $27,750 if single, or $41,625 for a head of household or $55,500 if married filing jointly if married filing jointly.
Limits to the Distribution – Generally, distributions reduce the eligible contributions. The contributions taken in determining the credit must be reduced by distributions received by you over a definite period of time, which the Internal Revenue Service labels the “test period”;the current tax year, the following tax year up to the due date of the tax return including filed extensions, plus the two preceding tax years comprises the “test period”. However, trustee to trustee transfers and rollover distributions do not reduce the amount of the credit. Neither do distributions from a military retirement plan contribute to the reduction of the credit.
How to Take the Credit You can take the credit on the form entitled “Credit for Qualified Retirement Savings Contributions” on Form 8880. You are entitled to the credit if you file Forms 1040 or 1040A. If you generally file Form 1040EZ then file Form 1040. The IRS permits you to file your 2009 tax return claiming an IRA contribution that will be made in 2010, in that case the IRS will consider that contribution providing it is made prior to the filing date of your tax return in the next year, 2010, as an allowable contribution when determining the amount of this credit. The amount of the retirement savings contribution credit claimed by you cannot be greater than your income tax liability less foreign tax credits plus alternative minimum tax liabilities.
This article is not intended to be legal or accounting advice. Tax laws are complex, change constantly and each situation is unique. The reader is advised to do his or her own due diligence and consult competent professionals in these areas.
Why not learn more about how we can help you determine if you are eligible for the retirement savings tax credit and other new IRS tax credits and about our reasonably priced internet and paperless based approach to tax preparation at affordable prices. Sandor(Sandy) E. Lenner,MBA-CPA has provided accounting and business services for over 35 years and works part-time at his wife’s CPA firm .