Managing your Ohwistha
Contributing to your retirement is one way to ensure you will have an income upon retiring.
These contributions also have tax advantages in the year in which you contribute. Your contributions to an employer sponsored retirement plan are deducted from your taxable wages(not taxable income) in the year of contribution. Payments toward an Individual Retirement Account may reduce your tax liability depending upon your personal circumstances. These same contributions may provide you a tax credit if you meet the guidelines below. As always to get the most helpful advice, consult your tax professional regarding your personal situation.
•Here are some tips from the IRS regarding the Retirement contribution credit.
If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit, depending on your age and income.
Here are six things the IRS wants you to know about the Savers Credit:
1. Income limits - The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and 2011 income of:
•Single, married filing separately, or qualifying widow(er), with income up to $28,250
•Head of Household with income up to $42,375
•Married Filing Jointly, with incomes up to $56,500
2. Eligibility requirements - To be eligible for the credit you must be at least 18 years of age, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount - If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 ($2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions - When figuring this credit, you generally must subtract distributions you received from your retirement plans from the contributions you made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.
5. Other tax benefits - The Retirement Savings Contributions Credit is in addition to other tax benefits you may receive for retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use - To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.
For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880.