Tax laws are often obscenely labyrinthine, and the publications that go along with your income taxes are no less so. For better or worse, the greater your knowledge of the tax code, the better off you'll be in this country.

So when I did my taxes this year, I went and looked for ways to reduce the amount I would have to pay. It turns out that I missed the one real gravy train I had - work that 401k! I contributed to my 401k a decent amount the past year, but I could have put more into it.

Instead of working my 401k harder this year, I elected to start a Roth IRA. Normally you only get the benefit of the Roth IRA when you take the money out, but I noticed an interesting credit that you can get for 'Qualified Retirement Savings Contributions' and Roth IRA contributions count towards this credit! (as well as 401k and traditional IRA contributions)

Unfortunately, as an individual earning over 26000 AGI (line 38 on the 1040) I cannot take this credit.

But my girlfriend could take pretty big advantage of this particular credit - mainly because she skated into the right AGI based on a student loan interest deduction.

It makes perfect sense to use a Roth IRA to take advantage of this credit, particularly if you are a young person that is currently earning a lower income, but a higher tax bracket is almost guaranteed later in life. Also, it's the only way to get an immediate tax benefit from a Roth IRA.

The thing is though, that the way they structure this credit, the only way you can get the maximum benefit (50 cents on the dollar more or less) is if your tax bill comes to at least $1000 and you contributed at least $2000 to your retirement account. However, the way it is structured, there is no way that any one person can achieve the full $1000 credit.

the retirement credit multiplier

I know that no one can achieve the full credit because I went through these forms in an attempt to achieve the full $1000 credit for my girlfriend, who due to various reasons earned a very low income for the year. Namely, after her student loan interest deduction, her income skated in under the $15,500 mark that is needed to get the maximum multiplier (0.5) that this credit uses. If you are over 15,500 in AGI, but under 26,000 the best multiplier you can get is .2! The multiplier is crucial, because this number essentially represents how much on the dollar (in reduced income taxes) the government will give you for each dollar you add to your retirement accounts - up to the first $2000 worth of contributions. So if my girlfriend contributes $2000 to a retirement account, she will be able to claim $1000 worth of retirement saver's credit.

However, her tax bracket means that she only owes $663 in taxes for 2007. Therefore, the maximum retirement saver's credit that she can claim is $663 - if she contributes at least $1326 to a retirement account for the 2007 tax year. This means she will pay no federal income tax for the 2007 tax year!

Not a bad deal! But considering the income levels that this credit is intended for, shouldn't they bump up their assistance a bit more? The only reason my girlfriend will be able to take advantage of this is because I'm willing to float her an interest-free loan (and I was willing to operate as her free tax professional).

our tax laws pay lip service to equality, while squeezing the little guy

What percentage of people eligible for this credit end up using it? Slim to none I imagine. How many people with incomes under 26k a year even have retirement accounts? How many people with these sorts of incomes are even aware of such tax possibilities? Considering that $1326 is about 8.5% of a 15,500 adjusted gross income, how could such a person contribute that much money to a retirement account, even if they knew they would get 100% of their withheld federal taxes returned to them?

I believe people at such income levels should be encouraged to save more money, and our government should be lending its assistance in any way possible. This is clearly not what is happening.

Either way though, if you're a starving-artist young person-type, you should really be looking at this credit with some dollar signs in your eyes! It's the government's form of 401k matching, more or less.