Most individuals are too busy throughout the year to keep a running tally of how much to expect in their next tax refund or balance due. When their tax return is eventually prepared, they may be surprised by the final outcome. Tax filers who qualify to take a traditional IRA deduction can often reduce their current taxable income with an IRA, thereby reducing their tax.
Almost all the line entries on an income tax return summarize activities that occurred during a specific 12-month period. However, an IRA contribution can be made up until the due date of the tax return for a particular year. For individual income tax filers, the April due date provides extra time to consider the effect of adding an IRA deduction.
Not all tax filers are eligible to deduct an IRA contribution. In fact, your level of income for the year may cause a reduction or the elimination of your ability to deduct an IRA. Your eligibility to take an IRA deduction also depends on whether you participated in a company retirement plan during the year, as well as your filing status.
Active participation in an employer retirement plan
If you participated in an employer-sponsored retirement plan during the year, there is an income range within which an IRA deduction is phased out. The income threshold amounts are dependent on your filing status.
No active participation in an employer retirement plan
If you are unmarried and not an active participant in an employer-sponsored retirement plan anytime throughout the tax year, you may fully deduct an IRA contribution of up to $5,500. If you are age 50 or over at the end of the year, the deduction limit is $6,500. If you are married filing jointly and your spouse also had no retirement coverage, both of you may fully deduct an IRA.
Spousal participation in an employer retirement plan
If you are not covered by a company retirement plan and file jointly, your IRA deduction is limited if your spouse has employer-provided coverage and your combined income reaches a phase-out range. A check mark in box 13 of Form W-2 is an indication of employee participation in a company retirement plan.
An IRA deduction is generally limited to the amount of earned income. However, alimony is taxable to the recipient and can be treated as compensation for purposes of funding an IRA. Your tax situation may change from year to year, presenting a new opportunity each year to consider adding a last-minute IRA. Contact an accountant like Alexander & Associates CPA for more information on this and other tax strategies.