You may be able to pay less tax by contributing to the UW's Voluntary Investment Program ("VIP") or to an individual retirement account ("IRA").
If you make contributions to the VIP or to an IRA, you may be eligible for a tax credit called the "saver's credit." This credit could reduce the federal income tax you pay dollar for dollar. 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%, depending on your adjusted gross income: the lower your income, the higher the credit rate. The credit rate also depends on your filing status.
The maximum contribution taken into account for the credit for an individual is $2,000. If you are married filing jointly, the maximum contribution taken into account for the credit is $2,000 each for you and your spouse.
The credit is available to you if you:
Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (as defined below) from any IRA, plan, or annuity listed above. Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable.
The testing period consists of:
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.
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 IRS 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.
For more information, see IRS Publication 571, Chapter 10.