Factors that Reduce the Eligible Contribution
Even if taxpayers qualify for the credit, their eligible contributions will be reduced by certain distributions received during the "testing period." The testing period includes:
The types of distributions that reduce the eligible contributions include any distribution:
For married taxpayers filing a joint return, both spouses may be eligible for a credit on a maximum annual contribution amount of $2,000 each. If either spouse has a distribution during the testing period, both spouses must reduce their eligible contribution by that amount.
Question the taxpayer to determine if there have been any distributions in the testing period. Do not include distributions that were not taxable because they were rolled over or transferred to another qualified plan. See Publication 4012, Nonrefundable Credits tab, for additional exceptions that do not need to be included in total distributions.