Up to a ,000 Income Tax Credit for Retirement Savings Contribution | Retirement

Up to a $2,000 Income Tax Credit for Retirement Savings Contribution

by SandorLenner

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

How the Credit is Determined - The credit is computed based on the your filing status and your adjusted gross income. The IRS provides a table that indicates an applicable % ranging from 10% to 50% to establish the amount of the credit.

Eligibility In order to use the credit, the following requirements must be met:(A)You must have made a contribution to an Individual Retirement Account or qualified retirement savings plan. (B) On December 31, 2009 you are required to be at least 18 years old. (C) You must not be claimed as a dependent by another person. (D) You not allowed to be a full-time student. (E)You had to be born prior to January 2, 1992. (F)Your adjusted gross income cannot be higher than $27,750 if single, or $41,625 for a head of household or $55,500 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.

Claiming the credit The credit can be claimed on your Form 8880, Credit for Qualified Retirement Savings Contributions. Taxpayers can only claim the credit if they file Forms 1040 or 1040A. Taxpayers that normally filed Form 1040EZ just need to file Form 1040 in order to claim this credit. Taxpayers who file their 2009 tax return claiming an IRA contribution that is going to be made in 2010, the IRS allows such taxpayers to consider that contribution as long it is being made prior to the filing date of their tax return in 2010 as an allowable contribution for purposes of determining the amount of this credit. The amount of the retirement savings contribution credit claimed by a taxpayer cannot exceed the taxpayer's regular 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.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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 system to tax preparation at affordable prices. Sandor(Sandy) E. Lenner,CPA-MBA has provided small business and accounting services for over 35 years and works part-time at his wife's CPA firm .