Your retirement contributions may qualify for a tax credit
August 6, 2008
Did you know that you might be eligible to claim a tax credit for contributions you make to your retirement plan? If you’re single and had a 2008 modified adjusted gross income of $26,500 or less, or if you’re married and file jointly and earned a modified adjusted gross income of $53,000 or less, you may qualify for the saver’s credit.
What is the saver’s credit?
Who can take the credit?
Where can I learn more about the credit?
What is the saver’s credit?
It’s a credit for qualified retirement savers to help offset their federal income taxes. It can range from 10% to 50% of eligible contributions.
This credit was introduced in 2001 as an incentive to encourage retirement saving.
The credit is nonrefundable, which means that the amount claimed as a credit can never be more than the total tax owed for a particular year.
Who can take the credit?
If you voluntarily contribute to a 401(k), 403(b), SIMPLE, SAR-SEP, governmental 457 plan, or a Traditional or Roth IRA and your modified adjusted gross income (AGI) falls within the ranges detailed below, you may be able to use all or part of the credit. Voluntary after-tax contributions to qualified employer plans may also apply toward the credit.
Here are two examples:
- If you’re single, had a modified adjusted gross income of $14,000 and contributed $500 to your retirement plan, you might qualify for a nonrefundable tax credit of $250.
- If you’re married and file a joint tax return, had a modified adjusted gross income of $45,000 and you and your spouse each contributed $2,000 to your respective retirement plans, you might qualify for a credit of $400.
See the table below to determine if you qualify.
| Filing status | 2008 Modified AGI* | Tax credit (As a percentage of your contributions up to $2,000) |
|---|---|---|
| Married, filing jointly | $0 - $32,000 | 50% |
| $32,001 - $34,500 | 20% | |
| $34,501 - $53,000 | 10% | |
| Head of household | $0 - $24,000 | 50% |
| $24,001 - $25,875 | 20% | |
| $25,876 - $39,750 | 10% | |
| Single, married filing separately, qualifying widow(er) | $0 - $16,000 | 50% |
| $16,001 - $17,250 | 20% | |
| $17,251 - $26,500 | 10% |
*Adjusted gross income is the income amount on which an individual’s federal income tax is determined. AGI is calculated by subtracting certain deductions from a total of all taxable income.
You may not take this credit if you are a student, under the age of 18, or are claimed as a dependent on someone else’s tax return.
Where can I learn more about the tax credit?
Your tax or financial representative can explain how the new tax credit works and help you determine if you qualify. Visit the IRS website to find more information and a worksheet (Form 8880) to help you figure any credit you can take.
Return to topInvestors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus and/or summary prospectus, which can be obtained from your plan’s financial professional or downloaded and should be read carefully before investing.