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Bolster retirement savings with little-noticed credit

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in Small Business Tax,Small Business Tax Deduction Strategies

In these trying economic times, young adults may find it difficult to save for retirement.

Strategy: A little-noticed tax break can provide a big boost to lower wage-earners.

The amount of the available credit depends on adjusted gross income (AGI), tax filing status and contribution amount.

Here’s the whole story: The retirement saver’s credit is applied to the first $2,000 of voluntary contributions made to a tax-qualified retirement plan such as a 401(k) or an IRA. Although greater contributions are permitted, the maximum amount allowed for the credit remains $1,000 ($2,000 for joint filers).

The credit may be equal to 50%, 20% or 10% of the qualified contribution, depending on the saver’s income bracket (see chart below). Once the income level for the 10% credit is exceeded, you can’t claim any credit. Other restrictions may apply. For instance, the credit can’t be claimed by a taxpayer who was under age 18 last year, a full-time student or a child who can be claimed as a dependent on someone else’s tax return.

Tip: This credit is nonrefundable. Thus, it may reduce your tax bill to zero, but you can’t claim a refund for any excess credit amount.

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