To encourage people with lower incomes to contribute to their retirement savings accounts, the Internal Revenue Service offers a tax credit for contributions to them. A tax credit directly reduces the amount of tax you owe, unlike a deduction, which only decreases your taxable income. In order to claim the retirement savings credit, you must use IRS form 8880.
Contributions you make to any qualified retirement plan can be used to satisfy the credit’s eligibility requirements. Qualified retirement plans include traditional IRAs, Roth IRAs, 401(k) plans, 403(b) plans and 457 plans. In the 2016 tax year, the maximum credit available to a single taxpayer is $1,000 and for joint filers, it increases to $2,000.
Your Adjusted Gross Income (AGI) must fall below the income limits for your filing status. For 2016, single filers with an AGI of $30,750 or more, head of household filers with AGI of $46,125 or more and joint filers with an AGI of $61,500 are ineligible to claim the credit. the credit percentage decreases as your AGI increases. For example, a single taxpayer with an AGI of $16,750 can claim a credit equal to 50 percent of her IRA contributions; whereas, a similar taxpayer with an AGI of $27,000 calculates the credit as only 10 percent of annual contributions.
Sources: IRS, TurboTax, Motley Fool