Retirement Savings Contributions Credit

While only available through 2006, this tax credit can help offset the cost of the first $2,000 your students contribute to IRAs, 401(k) plans, and certain other retirement plans. In contrast to a tax deduction, which reduces an individual’s taxable income, a tax credit results in a dollar-for-dollar reduction in the amount of taxes owed by an individual.

The Retirement Savings Contributions Credit is available to the following taxpayers:

• married couples who file jointly with adjusted gross income (AGI) of $50,000 or less
• individuals who file as head of household with AGI of $37,500 or less
• individuals who file as single with AGI of $25,000 or less

Other qualifications are:

• at least 18 years old
• not a full-time student
• not claimed as a dependent on another person’s return

Taxpayers with the lowest incomes will qualify for the largest tax credit. The credit is figured as a percentage of the qualifying contribution amount, as shown in the following table:

The amount of any contribution eligible for the Retirement Savings Contributions Credit is reduced by taxable retirement savings distributions that are received by the taxpayer and his or her spouse during the following time periods:

• the year for which the credit is claimed;
• the two years prior to the year the credit is claimed; or
• during the period after the end of the year and prior to the due date for filing the taxpayer’s return for the year.

In the case of a distribution from a Roth IRA, this rule applies to any such distributions, whether or not taxable.

See IRS Form 8880, “Credit for Qualified Retirement Savings Contributions,” to figure the amount of the credit to report on the Form 1040 or Form 1040A. For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs). Forms and additional information are available from www.irs.gov.