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 tax year
• The two preceding tax years, and
• The period between the end of the tax year and the due date of the return, including extensions

The types of distributions that reduce the eligible contributions include any distribution:

• That is included in the taxpayer's gross income from a qualified retirement plan or from an eligible deferred compensation plan
• From a Roth IRA that is not a qualified rollover contribution

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.