The federal income tax credit for contributions to retirement savings plans (IRAs and employer plans) is a good incentive to save for the future. A 50% tax credit is available to single taxpayers with an adjusted gross income (AGI) of $17,250 or less and couples earning $34,500 or less (2012 figures). Tax credits of 20% and 10% are available to those with higher incomes up to specified annual limits. Like all tax credits, the tax credit for retirement savings is subtracted directly from the amount a taxpayer owes. For example, if you owe $2,000 in taxes and receive a $1,000 credit, only $1,000 is owed.
The tax credit for the AGIs listed above is 50% of the amount contributed, up to $2,000. That means that the highest tax credit you can earn is $1,000, if you contribute $2,000 to a retirement savings plan. This is in addition to other deductions allowed for the amount of the contribution itself. Retirement savings tax credits, at various percentages, are available to single taxpayers earning up to $28,750 and couples with an AGI up to $57,500 (2012 figures). Adjusted gross income (AGI) is gross income minus certain allowable expenses such as alimony and contributions to retirement plans.
It is important to remember that retirement plan contributions do not have to be made all at once. Instead, you can save the money gradually as you earn it. For employer retirement plans, such as 401(k)s, you tell your employer how much to set aside from each paycheck. For example, you might contribute 1 percent of your pay ($150 if you earn $15,000). For IRAs, you can make deposits when you meet the minimum amount required by a specific retirement plan. For example, if a bank or mutual fund requires $250 for IRA deposits, you could make four $250 deposits, totaling $1,000, over the course of a year.
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