Understanding Modified AGI

The following examples further explain the effects of modified AGI in regards to 401(k) plans and IRA accounts.

Example – Eric and Heather, both age 28, are married and file a joint return for 2013. Eric contributed $3,000 through his 401(k) plan at work, and Heather contributed $500 to her IRA account. Their modified AGI for the year was $30,000. The credit is computed as follows:

Example – Eric and Heather file a return using the standard deduction for a married couple and their tax for the year is computed as follows:

The credit is nonrefundable and offsets the alternative minimum tax liability, as well as the regular tax liability.

Caution – To prevent taxpayers from withdrawing contributions from existing plans and, subsequently, re-contributing the funds in order to qualify for the credit, Congress built in a two-year look-back period that generally reduces a taxpayer’s current year contribution by withdrawals during the look-back period.

Affluent taxpayers might consider gifting lower-income family members the needed funds to contribute to an IRA, while simultaneously reducing their tax liability for 2012.

For more tips on retirement planning, be sure to check out Ainer & Fraker, LLP.