If you make eligible contributions to a savings plan set up for your retirement, and you meet certain requirements, you may qualify for a tax credit that can directly reduce your federal income tax by up to $1,000, and up to $2,000 if you are married filing jointly. This credit can be claimed in addition to the deduction for contributions to your IRA. You claim the credit by filing Form 8880 with your annual federal income tax return.
Qualifying Tests
This credit is available for contributions to a qualified retirement plan, a deferred compensation plan, or an Individual Retirement Arrangement (IRA). In order to qualify, you must meet the following tests:
You must have been born before January 2, 1987.
You cannot be a full-time student. You are considered a full-time student if you are enrolled for what the school considers to be a full-time course workload during some part of at least 5 calendar months during the year.
No one else can claim an exemption for you on their tax return.
Your adjusted gross income must not be more than:
$25,000 if you are filing as single, married filing separately, or qualifying widow(er) with a dependent child,
$37,500 if you are filing as head of household with a qualifying person, or
$50,000 if you are married filing jointly.
Eligible Contributions
You may be able to take this credit if you, or your spouse if you are married filing jointly, made:
Contributions to a traditional or Roth IRA.
Elective deferrals to a 401(k), 403(b), 457, SIMPLE IRA, or SEP salary reduction plan.
Voluntary contributions to a qualified retirement plan.
Voluntary contributions to a 501(c)(18) plan.
Calculating and Claiming the Credit
The retirement savings contributions credit is calculated by taking your eligible contributions as defined above, and subtracting certain distributions you have taken from retirements plans.
Reducing Eligible Contributions by Total Distributions
Your contributions eligible for the tax credit must be reduced by distributions you receive. The distributions that must be subtracted are those received during what is referred to as the testing period. These are distributions from the same retirement plans or accounts mentioned above, and by any distribution from a Roth IRA that is not rolled over. The testing period includes the two previous tax years, the current tax year, and the part of the next year up until the due date for filing your return.
But you do not have to reduce your contributions by any of the following:
Distributions that are not taxable because they are trustee-to-trustee transfers or rollover distributions,
Distributions that are returns of contributions made to an IRA during the year, provided the distribution was made before the due date for filing your tax return for that year, you do not take a deduction for the contribution, and the distribution included any earnings on the contribution,
Loans from a qualified employer retirement plan,
Distributions of excess contributions or deferrals, and earnings on them,
Distributions of dividends on stock held by an employee stock ownership plan.
Amount of the Credit
The amount of the credit you can claim is based on your income and the amount of eligible contributions you make. The maximum amount eligible for the credit is $2,000 per person, and the maximum credit rate, based on the lowest level of income, is 50%. So the maximum credit available is $1,000 per person and $2,000 for a married couple filing jointly.
The retirement savings contributions credit is a non-refundable credit, which means that the credit cannot be more than your tax liability. You cannot claim a refund if this credit exceeds your tax liability. But at the same time, this credit does not affect the refundable credits, including the earned income credit and the child tax credit, which can entitle you to a refund.
Where To Claim the Credit
This credit is claimed by filing Form 8880, Credit for Qualified Retirement Savings Contributions, which must be filed with your annual income tax return.