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Publication 571
Tax-Sheltered Annuity Plans (403(b) Plans)
(Revised: 12/2002)

For Employees of Public Schools and Certain Tax-Exempt Organizations


10. Retirement Savings Contributions Credit

Beginning in 2002, if you or your employer make eligible contributions (defined later) to a retirement plan, you may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). This credit could reduce the federal income tax you pay dollar for dollar.

Can you claim the credit?   If you or your employer make eligible contributions to a retirement plan, you can claim the credit if all of the following apply.

  1. You are not under age 18.
  2. You are not a full-time student (explained later).
  3. No one else, such as your parent(s), claims an exemption for you on their tax return.
  4. Your adjusted gross income (defined later) is not more than:
    1. $50,000 if your filing status is married filing jointly,
    2. $37,500 if your filing status is head of household (with qualifying person), or
    3. $25,000 if your filing status is single, married filing separately, or qualifying widow(er) with dependent child.

Full-time student.   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either:

  • A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or
  • A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government.

You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full time.

Adjusted gross income.   This is generally the amount on line 35 of your 2002 Form 1040 or line 19 of your 2002 Form 1040A. However, you must add to that amount any exclusion or deduction claimed for the year for:

  • Foreign earned income,
  • Foreign housing costs,
  • Income for bona fide residents of American Samoa, and
  • Income from Puerto Rico.

Eligible contributions.   These include

  1. Contributions to a traditional or Roth IRA, and
  2. Salary reduction contributions (elective deferrals) to:
    1. A 401(k) plan (including a SIMPLE 401(k)),
    2. A section 403(b) annuity,
    3. An eligible deferred compensation plan of a state or local government (a 457 plan),
    4. A SIMPLE IRA plan, or
    5. A salary reduction SEP.

They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or a section 403(b) annuity.

For purposes of this credit, an employee contribution will be voluntary as long as it is required as a condition of employment.

Reducing eligible contributions.   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity to which eligible contributions can be made. However, do not reduce your eligible contributions by the portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution.

Reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable.

Do not reduce your eligible contributions by any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if:

  1. The distribution is made before the due date (including extensions) of your tax return for that year,
  2. You do not take a deduction for the contribution, and
  3. The distribution includes any income attributable to the contribution.

Distributions received by spouse.   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit.

Testing period.   The testing period consists of:

  • The year for which you claim the credit,
  • The 2 years before the year for which you claim the credit, and
  • The period after the end of the year for which you claim the credit and before the due date of the return (including extensions) for filing your return for that year.

Example.   You and your spouse filed joint returns in 2000 and 2001, and plan to do so in 2002 and 2003. You received a taxable distribution from a qualified plan in 2000 and a taxable distribution from an eligible deferred compensation plan in 2001. Your spouse received taxable distributions from a Roth IRA in 2002 and tax-free distributions from a Roth IRA in 2003 before April 15. You made eligible contributions to an IRA in 2002 and you otherwise qualify for this credit. You must reduce the amount of your qualifying contributions in 2002 by the total of the distributions you received in 2000, 2001, 2002, and 2003.

Maximum eligible contributions.   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person.

Effect on other credits.   The amount of this credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the additional child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.

Maximum credit.   This is a nonrefundable credit. The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Education credits, then you will not be entitled to this credit.

How to figure and report the credit.   The amount of the credit you can get is based on the contributions you make and your credit rate. The credit rate can be as low as 10% or as high as 50%. Your credit rate depends on your income and your filing status. See Form 8880, Credit for Qualified Retirement Savings Contributions to determine your credit rate.

The maximum contribution taken into account is $2,000 per person. On a joint return, up to $2,000 is taken into account for each spouse.

Figure the credit on Form 8880. Report the credit on line 49 of your Form 1040 or line 32 of your Form 1040A and attach Form 8880 to your return.

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