How to Reduce Your Federal Tax With a Roth IRA

by Mark Kennan, studioD

Unlike traditional IRAs, you cannot report the amount of your contribution to a Roth IRA as an income tax deduction to reduce your taxable income for the year. However, if you qualify, you can use your Roth IRA contribution to reduce your federal tax with the retirement savings credit. This credit allows you to claim a percentage of up to $2,000 of your Roth IRA contribution against your tax liability. To qualify, your income must be less than the annual limits, you must be over 18 and you must not have been a full-time student during any part of five or more months.

Compare your adjusted gross income (AGI) to the annual limits for your filing status found in IRA Publication 590. For the 2010 tax year, you could not claim the credit if your AGI was over $55,500 and you were married filing jointly, $41,625 and head of household or $27,750 and single.

Make a contribution to your Roth IRA by the tax filing deadline, without extensions, for the tax year that you want to claim the credit. The deadline is usually April 15 of the following year.

Complete Form 8880 to calculate the amount of your credit. The amount of the credit appears on line 14 of the Form.

Enter the amount of the retirement savings credit on line 50 if you use Form 1040 or line 32 if you use Form 1040A. This credit reduces your federal taxes due for the year.

Items you will need

  • IRS Form 8880
  • IRS Form 1040 or 1040A

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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