Save on Taxes When You Save for Retirement
Retirement Savings Contributions Credit
© by Lita Epstein
Low income earners will be able to get a tax credit for money deposited into retirement plans. Tax credits are better than a tax deduction because they are subtracted from the actual tax owed rather than from the income amount on which taxes will be figured.
Generally, this credit is based on the first $2,000 put into a qualified retirement plan. Individuals who qualify must have an adjusted gross income (AGI) up to $25,000 ($37,500 for a head of household) and married couples filing jointly with AGI up to $50,000. The taxpayer must also be at least age 18, not a full-time student, and not claimed as a dependent on another person's return.
The credit is a percentage of the eligible contribution and deferral amounts. Here's a table from the IRS that shows how much credit is allowed:
When figuring the Retirement Savings Contributions Credit, taxpayers who have received distributions from their retirement plans generally must subtract these amounts from their contributions. This rule applies for distributions starting two years before the year the credit is claimed and ending the day before the filing deadline (including extensions) for that tax return. For 2002, subtract distributions received after 1999 and before Apr. 15, 2003, (or the extended filing deadline) from the total 2002 eligible contributions and deferrals, then multiply the result (but not more than $2,000 per taxpayer) by the credit rate applicable for the taxpayer's filing status and income level.
The subtraction rule does not apply to distributions that are rolled over into another plan, loans treated as distributions, trustee-to-trustee transfers, or withdrawals of excess contributions or deferrals (and income allocable to such excess amounts).
This credit is in addition to whatever other tax benefits may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Also, contributions to a 401(k) plan are not subject to income tax until withdrawn from the plan.
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Copyright 2003, by Lita Epstein.
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