taxes

An Overlooked Tax Break for Part-Timers

Semiretired or part-time workers saving money in an IRA or other retirement plan may qualify for an often-ignored tax credit that will lower their tax bill.

Question: I retired a few years ago, but I still get paid to do some consulting work, so I contribute to a Roth IRA. Can I qualify for the retirement savers' tax credit, too?

Answer: If your annual income is less than the cutoff, you can qualify for the retirement savers' tax credit. This frequently overlooked tax break is worth up to $1,000 per person ($2,000 for joint filers) if you contribute to a retirement savings account, such as a 401(k), traditional or Roth IRA, 403(b), 457, Simplified Employee Pension, SIMPLE or the federal Thrift Savings Plan.

The lower your income, the larger the credit. The maximum credit is worth 50% of your retirement-savings contribution for the year (up to $2,000 in contributions per person, with a maximum credit of $1,000). To claim the full credit on your 2017 federal tax return, your adjusted gross income must be less than $38,000 if you're married filing jointly, $28,500 if filing as head of household, or $19,000 if single or married filing separately. You can claim a credit for 20% of your contribution if your income is $38,001 to $41,000 if married filing jointly, $28,501 to $30,750 if filing as head of household, or $19,001 to $20,500 if single or married filing separately. And you can get a credit worth 10% of your contribution if your income is $41,001 to $63,000 if married filing jointly, $30,751 to $47,250 if filing as head of household, or $20,501 to $31,500 if single or married filing separately. You aren't eligible for the credit for 2017 if your income is more than that. To see the slightly higher income limits for 2018, go to the IRS's Retirement Savings Contribution Credits page.

You must also meet other criteria to qualify for the credit. You must be 18 or older, not a full-time student and not claimed as a dependent on another person's tax return. A lot of people overlook this credit in your situation (they are partially retired and their income has dropped, but they still earn some money and contribute to an IRA or other retirement savings plan).

To claim the credit, file Form 8880, Credit for Qualify Retirement Savings Contributions, with your 2017 tax return. This is a credit, not a deduction, so it lowers your tax liability dollar for dollar.

Most Popular

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022

Recommended

Where's My Refund? How to Track Your Tax Refund Status
tax refunds

Where's My Refund? How to Track Your Tax Refund Status

The IRS has an online tool that lets you track the status of your tax refund.
May 25, 2022
Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022
Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
May 23, 2022
Charitable Tax Deductions: An Additional Reward for the Gift of Giving
Tax Breaks

Charitable Tax Deductions: An Additional Reward for the Gift of Giving

With a charitable tax deduction, you can donate to a good cause and cut your tax bill at the same time.
May 19, 2022