March 31, 2017
Taxes, Taxes, Taxes
As the tax filing deadline approaches…
As the tax filing deadline approaches, many individuals are looking for ways to reduce their taxes. With the April 18th deadline fast approaching, there is one often-overlooked option: contributing to a Traditional IRA.
Traditional IRA contributions are tax-deductible and can be made up until the filing deadline. This means contributions for 2016 can be made as late as April 18, 2017. The benefits of Traditional IRAs are well-known: not only are the contributions tax-deductible, but the earnings grow tax-deferred, and taxes are only paid upon withdrawal—typically in retirement when individuals are in a lower tax bracket.
For individuals under the age of 50, the contribution limit is $5,500, while those aged 50 and older are allowed to contribute up to $6,500. With an effective tax rate of 20%, these contributions could result in tax savings of between $1,100 and $1,300 per person. However, as with all tax benefits, there are certain limitations to keep in mind.
To qualify for contributions and tax deductions, you or your spouse must have earned income (such as wages, salaries, or commissions) that exceeds the contribution amount. Income from pensions, annuities, dividends, or interest does not qualify. Additionally, you must be under the age of 70 ½ to make a contribution, and your ability to deduct the contribution for taxes depends on whether you were covered by a workplace retirement plan (such as a 401k or 403b) in 2016.
If you were not covered by a retirement plan at work, refer to the chart below to determine if your contribution would be deductible.
| If Your Filing Status Is… | And Your Modified AGI Is… | Then You Can Take… |
|---|---|---|
| single, head of household, or qualifying widow(er) | any amount | a full deduction up to the amount of your contribution limit. |
| married filing jointly or separately with a spouse who is not covered by a plan at work | any amount | a full deduction up to the amount of your contribution limit. |
| married filing jointly with a spouse who is covered by a plan at work | $184,000 or less | a full deduction up to the amount of your contribution limit. |
| more than $184,000 but less than $194,000 | a partial deduction. | |
| $194,000 or more | no deduction. | |
| married filing separately with a spouse who is covered by a plan at work | less than $10,000 | a partial deduction. |
| $10,000 or more | no deduction. | |
| If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single filing status. | ||
If you ARE covered by a retirement plan at work, see the chart below to determine whether your contribution would be deductible.
| If Your Filing Status Is… | And Your Modified AGI Is… | Then You Can Take… |
|---|---|---|
| single or head of household | $61,000 or less | a full deduction up to the amount of your contribution limit. |
| more than $61,000 but less than $71,000 | a partial deduction. | |
| $71,000 or more | no deduction. | |
| married filing jointly or qualifying widow(er) | $98,000 or less | a full deduction up to the amount of your contribution limit. |
| more than $98,000 but less than $118,000 | a partial deduction. | |
| $118,000 or more | no deduction. | |
| married filing separately | less than $10,000 | a partial deduction. |
| $10,000 or more | no deduction. | |
| If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “single” filing status. | ||
As you meet with your tax advisor and prepare to do battle with your return, discuss whether your tax situation would benefit from a Traditional IRA contribution for 2016 and the potential tax savings it could provide.
Shifting our focus to the 2017 tax season, another valuable tax savings tool, the Health Savings Account (HSA), is worth a look. Keep an eye out for Chad Wotton’s upcoming blog, as he looks to break down the many benefits of the HSA. As always, we at Gainplan would be happy to discuss your tax planning strategy and how we can help you maximize your tax benefits.
*Source: Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)
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