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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
Credit – The credit is computed based on the taxpayer’s filing status and adjusted gross income. The Internal Revenue Service provides a table that indicates an applicable percentage ranging from 10% to 50% to determine the amount of the credit.
Eligibility To be qualify for this credit, the following conditions must be met: (a) Taxpayer must have made a contribution to an IRA or qualified retirement savings plan. (b) Taxpayer must be at least 18 years of age as of December 31, 2009. (c) Taxpayer cannot be claimed as a dependent by someone else. (d) Taxpayer cannot be a full-time student. (e)Taxpayer had to be born prior to January 2, 1992. (f) The taxpayers adjusted gross income cannot exceed $27,750 if single, or $41,625 for a head of household or $55,500 if married filing jointly.
Distribution limitations – Distributions generally reduce the eligible contributions. The contributions taken into account in determining the credit must be reduced by distributions received by the taxpayer over a defined period, which the IRS calls the “test period”. The “test period” includes 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. However, rollover distributions and trustee to trustee transfers are not included as a reduction in the amount of the credit. Distributions from a military retirement plan do not reduce the taxpayers contribution.
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 provide legal or accounting advice. Because the 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 with professionals in these areas.
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 paperless and internet based methodology to tax preparation at affordable prices. Sandor(Sandy) E. Lenner,MBA-CPA has provided business and accounting services for over 35 years and works part-time at his wife’s CPA firm .
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