If you are looking to save on some taxes from last year and are not contributing to an IRA, now’s the time to start! You have until Tax Day, April 15, to make contributions to a traditional IRA and lower your tax bill from last year. Even if you contribute to a retirement plan at work, you may be able to deduct your IRA contributions depending on your income. To fund an IRA, you must have earned income from a job or business and be under 70 1/2 years of age. You don’t need to itemize your deductions to claim it and if you are eligible, the contribution will lower your adjusted gross income (AGI) which could enable other tax breaks based on your income. The real question is if you qualify for a tax deduction.
If you are not married and do not have a retirement plan through work, you can make a tax-deductible contribution of up to the maximum IRA contribution limit for 2012. For those under 50 years old, that’s $5,000. If you are at least 50, you can add another $1,000 “catch-up” contribution which increases the maximum to $6,000. Your income does not matter in this case.
If you are married and you are not covered by a work-place 401k but your spouse is, you can deduct the full amount only if your total AGI does not surpass $173,000 for 2012. If the total is between that and $183,000, then you’re entitled to a partial deduction. Over $183,000 combined AGI, then you cannot take a deduction.
If you do participate in a retirement plan through work, you may still be eligible for a tax deduction. You will get the max deduction if you are single and earned less than $58,000 or married and earned less than $92,000. For a partial deduction, you can earn up to $68,000 as a single person, or $112,000 if you are married. Again, above those amounts and you cannot take a deduction.
Further, small and moderate taxpayers may get another break contributing to an IRA (or other retirement plan). The Retirement Saver’s tax credit can save you another $1,000 depending on your income. You will save from 10-50% on the first $2,000 contributed to your retirement plan. The income limits are as follows: $28,750 if you are single, $43,125 if you are head of household w/ dependents and $57,500 if you are married filing jointly.
With Tax Day less than two months away, utilize this method to not only save for retirement, but also get a tax break this year. If you have any questions about this or anything else retirement planning related, contact the tax experts at the IRA Financial Group today!