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.
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