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George Saenz, the Tax Talk columnistGetting a tax credit for a SEP-IRA

Dear Tax Talk,
A friend asked me a question regarding the retirement saver's credit and how it relates to SEP contributions. I don't know the answer and am getting more confused trying to figure it out!

If you are self-employed and have a SEP-IRA and contribute to that, can you claim the credit? Or are you precluded since you are the employer as well as the employee?

Publication 590 talks about salary reduction SEP; I thought all SEPs were basically salary reduction mechanisms. Thanks for any light you can shed on this.
-- J.J.

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Dear J.J.,
In order to encourage retirement savings among lower-income taxpayers, Congress provides a tax credit against federal income taxes for contributions made to most retirement plans.
You may be able to take the credit if you make eligible contributions to a qualified retirement plan, an eligible deferred-compensation plan or an individual retirement arrangement (IRA). You might be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). In addition to the tax savings you get from taking a deduction, this credit could reduce the federal income tax you pay dollar for dollar.

You can claim the credit if all of the following apply:

  1. You were born before Jan. 2, 1987.
  2. You are not a full-time student.
  3. No one else claims an exemption for you on their tax return.
  4. Your adjusted gross income is not more than:
    a) $50,000 if your filing status is married filing jointly,
    b) $37,500 if your filing status is head of household (with qualifying person), or
    c) $25,000 if your filing status is single, married filing separately or qualifying widow(er) with dependent child.

Although you're right -- Publication 590 doesn't make it clear that a SEP-IRA contribution for a self-employed individual is eligible -- practically all retirement savings plans are eligible for the credit. For example, included are after-tax contributions such as to a Roth IRA and to a retirement plan. If your W-2 shows retirement-plan contributions, these would also be eligible for the credit.

The amount of the credit you can get is based on the contributions you make and your credit rate. Your credit rate can be as low as 10 percent or as high as 50 percent. Your credit rate depends on your income and your filing status. The higher your income, the lower the credit rate. See Form 8880 to determine your credit rate.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.'s corrections policy -- Posted: March 30, 2006
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