The US government now offers a tax credit of up to $2,000 for contributions to retirement savings accounts. The IRS has announced a benefit for individuals who contribute to IRAs or employer-sponsored retirement plans.
This credit is intended for individuals with low to moderate income levels and has specific requirements. Citizens must meet certain IRS-established eligibility requirements. This assistance, which varies according to the amount of contributions and each taxpayer’s income, is intended to provide financial relief and encourage long-term retirement savings.
Eligibility Criteria for the IRS Tax Credit
To qualify for the IRS credit, you must meet the following criteria:
- Be at least 18 years old.
- Not be claimed as a dependent on another person’s tax return.
- Not be classified as a student.
During five calendar months of the fiscal year, a student is defined as:
- Were enrolled as a full-time student at a school.
- Participated in a full-time training course on a farm conducted by a school or a state, county, or local government agency.
A “school” includes technical, trade, and mechanical schools, but excludes job training programs, correspondence schools, and institutions that only offer classes online.
Understanding the IRS Credit Amount
The IRS credit amount is based on your adjusted gross income (as reported on Form 1040). Credit percentages range from 50%, 20%, or 10% based on income level. This credit is applicable to the following contributions:
- Contributions made to a traditional or Roth IRA.
- Salary deferral contributions to a 401(k), 403(b), governmental 457(b), SARSEP, or SIMPLE plan.
- Voluntary after-tax contributions to a qualified retirement plan, including the federal Thrift Savings Plan or a 403(b) plan.
- Contributions to a 501(c)(18)(D) plan.
- Contributions to an ABLE account where you are the designated beneficiary (starting from 2018).
Understanding Contribution Limits and Tax Credits
It’s important to note that transferred contributions are not eligible for this credit. Recent distributions from retirement plans, IRAs, or ABLE accounts may reduce your eligible contributions.
The credit allows for a maximum contribution of $2,000 (or $4,000 for married couples filing joint returns). The maximum credit you can receive is $1,000 (or $2,000 for joint returns). To determine your credit, consult the IRS table.
Consider Jill, who works in a retail store. Jill is married and made $41,000 in 2021. In 2021, her spouse was unemployed and did not have an income. Jill contributed $2,000 to her IRA this year.
After deducting her IRA contribution, their joint return shows an adjusted gross income of $39,000. According to the IRS, Jill can claim a 50% credit for her $2,000 IRA contribution on her 2021 tax return.
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