INDIVIDUAL RETIREMENT ACCOUNTS |
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Low income taxpayers who contribute to their IRA or other qualified retirement plans may receive a tax credit. The amount of the credit is based on the taxpayer's income level and the amount contributed. The maximum credit amount is $1,000. (The Pension Protection Act of 2006 made this credit permanent.)
The credit applies to the first $2,000 in net contributions made to any of the following:
contributions to traditional IRAs and Roth IRAs;
salary reduction contributions to a SARSEP-IRA, SIMPLE IRA, 401(k) "Cash or Deferred Arrangement", SIMPLE 401(k)s, government 457 plan "deferred compensation plan of a state or local government", 403(b) annuity plans "tax sheltered annuities";
and voluntary after-tax contributions to qualified retirement plans or 403(b) annuities -- voluntary means that the contributions are not required as a term of employment.
To calculate the amount of net contributions made: add all contributions made to any of these plans and subtract any distributions taken by the taxpayer (or spouse if filing jointly) from these plans in during the tax year, in any of the past two tax years or at any time between the end of the tax year and the time the taxes are filed (including extensions). The maximum total net contributions, for purposes of calculating the credit are capped at $2,000.
If a taxpayer has made a net contribution during the year, he or she may be entitled to a credit based on their income level (adjusted gross income plus any deductions taken for foreign housing costs, foreign earned income or income earned as a resident of Puerto Rico or American Samoa):
The credit is found by multiplying the appropriate credit rate times the total net contribution (up to $2,000). The maximum credit is, therefore, $1,000 (50% of $2,000) The credit is also limited by the total tax liability that would be due if the credit were not applied, i.e., the credit will NOT reduce the taxpayer's tax liability to less than zero.
This credit is NOT available to:
taxpayers under age 18,
full time students (those attending class in 5 calendar months during the year), or
those claimed as dependents on another taxpayer's return.