Thursday, May 23, 2013

Federal credit for IRA contributions

If your annual income is more than about $10,000 but less than $28,750 (single) or $57,500 (married filing jointly), the U.S. Government will give you up to $1,000 per year to help defray your retirement contributions. Here's how.

Congress adopted the "savers credit" in order to encourage people to contribute to retirement plans. If your employer offers a retirement account that you contribute to (such as a 401k plan), your contributions are eligible. If not, you can make the contributions to a separate IRA.

Under this plan, you can claim up to 50% of your retirement contributions as a credit against your Federal tax liability, up to $1,000 based on a contribution of $2,000. The full 50% is available to persons with an adjusted gross income under $16,750 single / $33,500 married filing jointly. At higher levels of income, the credit is reduced.

Unlike a deduction, which reduces income and thus partially reduces taxes, a credit is a full offset of a tax liability. If the government gives you a tax credit for a particular activity, this means that the government is paying for it fully, with money you would otherwise have to send to the IRS. This applies even if you get a refund at tax time.

This is a nonrefundable credit, meaning that you will have to have a tax liability that this credit will offset. It is not available to those who will pay no taxes - i.e., single people whose income is less than about $9,700. And the largest credit, 50% of contributions up to $2,000, is available only to persons whose income is quite low - $17,250 for a single person. Of course, someone making that little is very unlikely to be willing, or able, to direct as much as $2,000 to a retirement account.

Those making between $17,250 and $28,750 will be able to claim a credit of only $200-400 based on a $2,000 contribution.

See IRS Publication 590, page 79, for more information.

No comments:

Post a Comment

More tax from online sales

From Bloomberg: The IRS is coming for your Venmo income.   The IRS is reported to have imposed a new requirement for Form 1099-K, on which a...