Final answer:
Barbara is eligible for the Saver's Credit with an income of $25,000 and an IRA contribution of $4,000. She falls into the 20% credit range, so her maximum credit is 20% of $4,000, which is $800, limited by her income tax liability of $2,000.
Step-by-step explanation:
Barbara is eligible for a Retirement Savings Contribution Credit, also known as the Saver's Credit, which is a tax credit designed to encourage low and middle-income individuals to contribute to retirement accounts such as Traditional and Roth IRAs. Since Barbara's Adjusted Gross Income (AGI) is $25,000 and she contributed $4,000 to her traditional IRA, her income falls within the range that allows her to take advantage of this credit.
The amount of the Saver's Credit can be 10%, 20%, or 50% of your retirement plan or Individual Retirement Account (IRA) contributions, depending on your income and filing status. For the year 2023, the maximum adjusted gross income for a 50% credit rate is $20,500 for a single filer, $31,125 for a head of household, and $41,000 for a married couple filing jointly. For a single filer to qualify for the 10% credit rate, their AGI must be between $21,500 and $34,000.
Since Barbara's AGI is $25,000, she falls into the 20% credit bracket. Therefore, her maximum Retirement Contribution Savings Credit would be 20% of her $4,000 contribution, which amounts to $800. However, since her income tax liability for the year is $2,000, the credit cannot reduce her tax liability below zero. Hence, Barbara's maximum retirement contribution savings credit would be equal to her tax liability of $2,000, but the credit will be capped at $800, which is 20% of her IRA contributions.