Tax time is coming soon. The IRS starts accepting e-file Friday January 14th and employers are in the process of getting W-2s out. Many people pay more taxes than they need to because they fail to take all the credits that are available to them. One of the most commonly overlooked credits it the Retirement Savings Contribution Credit.
[In pictures: 10 Ways to Improve Your Finances in 2011.]
The Retirement Savings Contribution Credit is a tax credit of up to $1000 ($2000 if married filing jointly) that you may be able to take if you make eligible contributions to an employer sponsored retirement plan or an IRA. This credit could reduce the amount of your federal income tax liability dollar for dollar. It is a non-refundable credit so the amount of your RSCC can not exceed the amount of your tax liability.
In order to be able to claim the RSCC you must meet the following conditions. You must be 18 or older and not a full-time student. No one else (such as parents) can claim an exemption for you on their tax return. Your adjusted gross income must not be more than $55,000 if your filing status is married filing jointly, $41,625 if your filing status is head of household or $27,750 if your filing status is single, married filing separately or qualified widow(er).
The amount of your tax credit is determined by how much you contribute to a qualified retirement plan and your credit rate. The credit rate ranges from as low as 10 percent to as high as 50 percent and is determined by your filing status and income. You can find your credit rate using Form 8880 at IRS.gov.
Most people whose income is low enough to qualify for the 50 percent rate likely will not be able to contribute enough to their retirement savings to qualify for the maximum credit but their tax liability is probably less than that. Even if you only qualify to receive the 10 percent credit rate the credit is worth taking since you should be saving for your retirement anyway. If you contributed to an IRA or your employer’s retirement plan and your income is within the guidelines be sure to determine whether you qualify for this credit when filing your taxes.
Andy Hough writes about frugality and living well on a small income at TightFistedMiser.com.