Using the Retirement Savings Credit

I have found in my experience as a volunteer tax return preparer that some folks are unaware of (or forget) the retirement savings credit that is available to some taxpayers. The basic principle for this credit is this: If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement account (IRA), you may be able to take a credit against your federal income taxes. The amount of the credit you can get is based on the contributions you make and your “credit rate.”

If you are eligible for the retirement savings credit, your credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income. The lower your income, the higher the credit rate.  Your credit rate also depends on your filing status (single, married or head of household.) The maximum credit is $1,000 for single filers and $2,000 for married filers.

You are not eligible for the credit if your adjusted gross income (AGI) exceeds certain amounts as follows:

• $27,750 as a single filer
• $41,625 as head of household
• $55,500 if married filing jointly

To claim the credit, your contributions must be to a qualified retirement plan. These include a traditional or Roth IRA (but not rollover contributions), 401(k), SEP-IRA, SIMPLE IRA, the federal Thrift Savings Plan, or a 403(b) plan.

Also, you are disqualified from the retirement savings credit if any of the following apply:

• You were a full-time student for any five months in 2009 (not including online-only schools)
• You were under 18
• You were claimed as a dependent by another taxpayer.

Also, if you took a pre-retirement distribution from a qualified retirement account, that distribution will offset the credit.

The retirement savings credit is not refundable, so if you do not pay federal income taxes, you will not benefit from the credit.

To claim the credit, you must file IRS Form 8880 with your Form 1040 or 1040A.  You can download Form 8880 and instructions here.

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