A nonrefundable retirement saver's tax credit is available for individuals with low incomes. In 2012, a single person making up to $17,250 or a couple making $34,500 or less can qualify for a 50 percent tax credit on the first $2,000 they each save toward retirement. For example, an individual who contributes $2,000 to an IRA could qualify for a $1,000 tax credit. The tax credit phases out as income increases.
A single person earning $17,251 to $18,750 and a married couple earning $34,001 to $37,500 throughout the year are eligible for a 20 percent tax credit (2012 figures). A single person earning $18,751 to $28,750 and a married couple earning $37,501 to $57,500 each year could still qualify for a 10 percent credit. The credit is based on your total contributions to all eligible retirement accounts, not for contributions to each.
This is a tax credit, rather than a deduction, and thus is worth more. The amount of the credit comes off the tax owed rather than your taxable income (e.g., $2,000 tax-$500 credit = $1,500 tax). Many people use their income tax refund as a means for starting or increasing their savings. IRS Form 8888 allows a taxpayer to direct their refund into up three different accounts. Consider using this tool to direct some or all of any refund you might be receiving into a savings, IRA, or mutual fund account. For more information search for "Form 8888 Direct Deposit of Refund" on the IRS Web site at http://www.irs.gov.
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