John M. Hoffman & Associates CPAs

Frequently Asked Tax Questions

Individual Retirement Accounts – IRAs

 

“What about that tax credit for making an IRA contribution?”

• There is a tax credit available for low income taxpayers making contributions to IRAs, 401(k)’s, SEPs, etc.

• To be eligible for this credit, a taxpayer must be at least 18 years old and must not be claimed as a dependent by another.

• The credit is a percentage of up to $2,000 of contribution to an IRA, SIMPLE plan, SEP plan, 401(k) plan, section 457 plan, and more.

• The credit is effectively phased out when the applicable percentage for the credit drops to zero. The table for the credit rates can be found at: http://www.irs.gov/pub/irs-pdf/f8880.pdf (this is form 8880).

As you may see, single taxpayers with adjusted gross income (AGI) below $15,000 get a credit of 50%. You may also note that a single taxpayer with AGI over $26,000 get zero credit.

There are other restrictions to be eligible for the credit such as not withdrawing the funds within two years of making the contribution.

We only see this credit occasionally. One reason is that most taxpayers with income low enough to qualify for the credit either do not have the money to make a contribution or their tax is already zero and the credit does not help. When it works, it is handy.