What is the retirement savings contributions credit?

If you made contributions to a retirement plan, you may be able to claim a credit for those contributions, lowering your tax liability. This includes contributions to things like an IRA and 401(k) plan. You cannot claim this credit if you were born on or after January 1, 1988, if you are being claimed as someone else’s dependent or if you were a full-time student during the tax year. In addition, you cannot claim the credit if your adjusted gross income was over a certain amount - for the 2006 tax year, these amounts are: (i) $25,000 if you are single, married filing separately or a widow or widower); (ii) $37,500 if you are the head of household; or (iii) $50,000 if you are married filing jointly.

You can calculate the credit on Form 8880, which you should then attach to your Form 1040 or 1040A (you cannot claim the credit if you are filing a Form 1040EZ). As you will see on Form 8880, you may deduct a portion of up to $2,000 of your retirement contributions (or $4,000 if you are married filing jointly). The precise percentage of your retirement contributions which you can claim is based on your filing status and your adjusted gross income as follows (at least, for the 2006 tax year):

1. If you are married filing jointly, you may claim 50% of your contributions if your adjusted gross income was $30,000 or less, you may claim 20% of your contributions if your adjusted gross income was between $30,001 and $32,500, and you may claim 10% of your contributions if your adjusted gross income was between $32,501 and $50,000 (if your adjusted gross income was over $50,000, you cannot claim this credit).

2. If you are the head of household, you may claim 50% of your contributions if your adjusted gross income was $22,500 or less, you may claim 20% of your contributions if your adjusted gross income was between $22,501 and $24,375, and you may claim 10% of your contributions if your adjusted gross income was between $24,376 and $37,500 (if your adjusted gross income was over $37,500, you cannot claim this credit).

3. If you are single, married filing separately, or a widow or widower, you may claim 50% of your contributions if your adjusted gross income was $15,000 or less, you may claim 20% of your contributions if your adjusted gross income was between $15,001 and $16,250, and you may claim 10% of your contributions if your adjusted gross income was between $16,251 and $25,000 (if your adjusted gross income was over $25,000, you cannot claim this credit).

Finally, the retirement savings contributions credit is not refundable. This means that if your credit exceeds the amount of your tax liability, you are not entitled to get the difference returned to you.