Tax Credit Available for Retirement Plan Contributions

Money 2000 and Beyond The federal income tax credit for contributions to retirement savings plans (IRAs and employer plans) is a good incentive to save for the future. A 50% tax credit is available to single taxpayers with an adjusted gross income (AGI) of $15,000 or less and couples earning $30,000 or less. Tax credits of 20% and 10% are available to those with higher incomes.

Like all tax credits, the tax credit for retirement savings is a subtracted directly, dollar for dollar, from the amount that a taxpayer owes. For example, if you owe $2,000 in federal income taxes and receive a $500 credit, only $1,500 is owed.

The tax credit for the AGIs listed above is billed as 50% of the amount contributed, up to $2,000. This is in addition to other deductions allowed for the amount of the contribution itself. Retirement savings tax credits, at various percentages, are also available to single taxpayers earning up to $25,000 and couples with an AGI of up to $50,000. The amount of the credit decreases, however, to 20% and then to 10%, as taxpayers' income increases.

Unfortunately, the full tax credit promised is not available, due to a quirk in the way that the tax law was written. This is because adjusted gross income is calculated before subtracting your personal exemption and the standard deduction to arrive at your taxable income, which is the figure that the tax credit is actually based upon.

A single person with a $15,000 AGI would have a taxable income of $7,300 after subtracting a $3,000 exemption and the $4,700 standard deduction. According to Kiplinger's Personal Finance magazine, the maximum credit that is actually available is $795 (instead of $1,000) for single taxpayers and $1,823 (instead of $2,000) for married couples filing jointly.

The retirement saver's tax credit is not available to workers under age 18, full-time students, and persons who are claimed as dependents. The table below indicates the adjusted gross income levels required for different levels of saver's credits.
Tax Credit For Retirement Plan Contributions 

 

Percent                           Head of             Married 

Credit       Single              Household         Filing Jointly 

 

 50%    $     0 - $15,000    $     0 - $22,500    $     0 - $30,000 

 20%    $15,001 - $16,250    $22,501 - $24,375    $30,001 - $32,500 

 10%    $16,251 - $25,000    $24,376 - $37,500    $32,501 - $50,000 

  0%    $25,001 and over     $37,501 and over     $50,001 and over


Note: The income levels listed above are for adjusted gross income (AGI). AGI is gross income minus certain allowable expenses such as alimony and contributions to retirement plans.

It is important to remember that retirement plan contributions do not have to be made all at once. Instead, you can save the money gradually as you earn it. For employer retirement plans, such as 401(k)s, you tell your employer how much to set aside from each paycheck. For example, you might contribute one percent of your pay ($150 if you earn $15,000).

For IRAs, you can make deposits when you meet the minimum amount required by a specific retirement plan. For example, if a bank or mutual fund requires $250 for IRA deposits, you could make four $250 deposits, totaling $1,000, over the course of a year.

A tax credit is a very valuable write-off, so try to make the most of it. You can also adjust your tax withholding now so that the credit is spread out over the entire year. For further information about the retirement savings tax credit, contact the IRS at 1-800-829-1040 or www.irs.gov.

  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences