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Are You Eligible For The Retirement Savings Contributions Credit?

Everyone seems to be living on a very tight budget these days, so it is not surprising that planning for retirement does not seem to make anyone's priority list. However, the tragedy is that most people don't realize just how important this is until it is too late. Many senior citizens have not adequately planned and will either live only on Social Security income or deplete their retirement savings before the end of their lives. Unfortunately, this fear has not encouraged younger people to get serious and consider starting an IRS recognized retirement account.

Congress hopes that working-class people will reconsider this decision. The Internal Revenue Code provides for the retirement saver's contribution credit, a tax credit available for low- to moderate income taxpayers that made contributions to an IRS-approved retirement account. Unlike a tax deduction (which merely reduces how much of your income is subject to federal taxation), a tax credit is a dollar-for-dollar reduction of your overall tax bill. For example, if your total tax liability to the IRS is $5,000.00 and your tax credit is $1,000.00, then your overall tax bill is reduced to $4,000.00. The credit itself is an applicable percentage of the qualified retirement savings contributions of a taxpayer during the tax year not exceeding $2,000.00. 26 U.S.C. §25B(a).

The applicable percentage for determining the retirement saver's contribution credit in tax year 2019 is as follows:

  • FOR MARRIED FILING JOINTLY FILERS (26 U.S.C. §25B(b)(1)):
  1. 50% of contribution IF adjusted gross income is not more than $38,500.00.
  2. 20% of contribution IF adjusted gross income is between $38,501.00 and $41,500.00.
  3. 10% of contribution IF adjusted gross income is between $41,501.00 and $64,000.00.
  4. No credit if adjusted gross income is more than $64,000.00.
  • FOR HEAD OF HOUSEHOLD FILERS (26 U.S.C. §25B(b)(2)(A)):
  1. 50% of contribution IF adjusted gross income is not more than $28,875.00.
  2. 20% of contribution IF adjusted gross income is between $28,876.00 and $31,125.00.
  3. 10% of contribution IF adjusted gross income is between $31,126.00 and $48,000.00.
  4. No credit if adjusted gross income is more than $48,000.00.
  • FOR SINGLE FILERS, MARRIED BUT SEPARATE FILERS OR QUALIFIED WIDOW FILERS (26 U.S.C. §25B(b)(2)(A)):
  1. 50% of contribution IF adjusted gross income is not more than $19,250.00.
  2. 20% of contribution IF adjusted gross income is between $19,251.00 and $20,750.00.
  3. 10% of contribution IF adjusted gross income is between $20,751.00 and $32,000.00.
  4. No credit if adjusted gross income is more than $32,000.00.

The maximum credit can be $1,000.00. A taxpayer is eligible to claim the retirement saver's contribution credit if he or she has attained age 18 by the last day of the tax year. Dependents of another taxpayer and full-time students under age 24 do not qualify. 26 U.S.C. §25B(c).

The retirement saver's contribution credit can be taken for contributions to your traditional or Roth IRA; your 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan; and your voluntary after-tax employee contributions to your qualified retirement and 403(b) plans. 26 U.S.C. §25B(d)(1). In addition, the Tax Cuts and Jobs Act of 2017 allows a credit to be taken for contributions to an ABLE account of which such individual is the designated beneficiary. 26 U.S.C. §25B(d)(1)(D).

The retirement saver's contribution credit is reduced by any distributions you received from a retirement plan or IRA during the tax year. 26 U.S.C. §25B(d)(2)(A). In addition, rollover contributions from one retirement account to an IRA are not eligible for the credit. 26 U.S.C. §25B(d)(2)(C).

This tax credit is not as well-known or as popular as the earned income credit or the child tax credit, but it incentivizes planning for retirement by providing a substantial tax benefit for qualified contributions. Keep in mind that this is a non-refundable credit, meaning that it will not reduce your tax bill below zero. This credit is claimed by filling out Form 8800 and attaching it to your individual tax return. If you have not been claiming the credit on your Form 1040 but were eligible, it may be possible to file an amended tax return for up to three previous tax years to realize these savings. Don't let the Internal Revenue Service hold on to the hard-earned money that you are entitled to. This benefit can net you up to $1,000.00 per tax year!

If you have questions about the retirement saver's contribution credit or any other aspect of federal taxation, then do not hesitate to contact the tax professionals at Kershaw, Vititoe & Jedinak PLC today.

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