The U.S. Government has introduced an innovative tax credit allowing citizens to receive up to $2,000 for contributions made to their retirement savings accounts. The IRS, responsible for tax administration in the country, has announced that this benefit targets individuals making contributions to their IRA or employer-sponsored retirement plans.
The requirements to qualify for this credit are specifically designed for individuals with low to moderate income levels. To be eligible, citizens must meet certain criteria set by the IRS. This assistance, which varies depending on the amount of contributions and each taxpayer’s income, aims 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 requirements:
- Be at least 18 years old.
- Not be claimed as a dependent on another person’s tax return.
- Not be classified as a student.
You are considered a student if, during any part of five calendar months of the fiscal year, you:
- 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 does not cover job training courses, correspondence schools, or institutions offering classes solely online.
Understanding the IRS Credit Amount
The amount of the IRS credit you can receive is determined by your adjusted gross income, as reported on Form 1040. The credit percentage ranges from 50%, 20%, or 10%, depending on your income level. This credit applies 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 crucial to note that transferred contributions do not qualify for this credit. Additionally, your eligible contributions might be reduced if you have received any recent distributions from a retirement plan, IRA, or ABLE account.
The maximum contribution that qualifies for the credit is $2,000 (or $4,000 if you’re married and filing a joint return). This means the maximum credit you can receive is $1,000 (or $2,000 for a joint return). To determine your credit, you’ll want to consult the table provided by the IRS.
Consider the example of Jill, who works in a retail store. Jill is married and earned $41,000 in 2021. Her spouse was unemployed in 2021 and had no income. Jill contributed $2,000 to her IRA for the year. After deducting her IRA contribution, the adjusted gross income on their joint return is $39,000. According to the IRS, Jill can claim a credit of 50% of $1,000 for her $2,000 IRA contribution on her 2021 tax return.