A:

There is an added incentive for adding to your retirement nest egg, if your income falls within certain limits.

Under this incentive program, you are eligible for a non-refundable tax credit of up to $1,000 for contributions you make to an individual retirement account (IRA), or salary deferral contributions you make to a 401(k) plan, SIMPLE IRA, SARSEP, 403(b) arrangement or 457(b) plan.

This incentive program applies if your modified adjusted gross income (MAGI) falls within the ranges listed below. The percentage of credit for which you are eligible is also indicated in the chart below. Certain other restrictions apply. For instance, you must be at least age 18 to claim the credit, and you cannot claim the credit if you were a full-time student for the year and/or if you can be claimed as a dependent on someone else's tax return.

Credit Rate Married and files a joint return Files as head of household Other category of filers
50% Up to $31,000 Up to $23,250 Up to $15,500
20% $31,001 – $34,000 $23,251 – $25,500 $15,501 – $17,000
10% $34,001 – $52,000 $25,501 – $39,000 $17,001 – $26,000
0% $52,000+ $39,000+ $26,001+

Distributions from your retirement plans in the two-year period preceding the year for which you claim the credit will affect the amount of credit for which you are eligible. This does not include distributions that were properly rolled over, return of excess contributions, loans from your qualified plan or 403(b) account treated as distributions and distributions from a limitary retirement plan.

The credit is claimed by filing IRS Form 8880.

To read more frequently asked tax questions, see How do I avoid paying excess taxes on securities I have sold?, How can I make sure I'm ready to file my taxes?,Common Tax Questions Answered and What are some commonly missed deductions for business owners?

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

Hot Definitions
  1. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  2. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  3. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
  4. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
  5. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  6. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
Trading Center