IRS Clarifies Retirement Savings Contributions Credit

You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly) if you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, says the IRS.

The Retirement Savings Contributions Credit applies to individuals with incomes up to $25,000 ($37,500 for a head of household) and married couples, filing jointly, with incomes up to $50,000. You must also be at least age 18 (born before January 2, 1987), not a full-time student, and not claimed as a dependent on another person’s return.

The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income, as shown in this chart: .

Credit Rate Income for Married Joint Income for Head of Household Income for Others
50% up to $30,000 up to $22,500 up to $15,000
20% $30,001–32,500 $22,501–24,375 $15,001–16,250
10% $32,501–50,000 $24,376–37,500 $16,251–25,000

When figuring this credit, you must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return.

Form 8880, “Credit for Qualified Retirement Savings Contributions,” is used to figure the amount of the credit, which is then reported on line 50 of Form 1040, or Form 1040A, line 32. For your 2004 tax return, you would first subtract distributions received from Jan. 1, 2002, through April 15, 2005, from your total 2004 retirement contributions. Then you would multiply the result (but not more than $2,000) by the credit rate that applies to your filing status and income level. The maximum credit amount allowed for 2004 is $1,000, or up to $2,000 if married filing jointly and each spouse made contributions.

The subtraction rule does not apply to distributions which are rolled over into another plan or to withdrawals of excess contributions.

The Retirement Savings Contributions Credit is in addition to whatever other tax benefits may result from the 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 Contributions to a 401(k) plan are not subject to income tax until withdrawn from the plan.

For more information, review IRS Publication 590, “Individual Retirement Arrangements (IRAs) and Form 8880, Credit for Qualified Retirement Savings Contributions” which include the instructions. The publication and forms can be downloaded or ordered by calling toll free 1-800-TAX-FORM (1-800-829-3676).

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