March 31, 2017
Taxes, Taxes, Taxes
As the tax filing deadline looms…
The April 18th tax filing deadline is almost upon us. It is a day that cannot come quick enough for some, and others wish would never arrive. Many people find themselves looking for last minute solutions to reduce their tax bill. There are not many, but there is one simple option that is often overlooked.
Traditional IRA contributions are tax deductible and can be made up until the tax filing deadline. This means 2016 contributions may be made as late as April 18, 2017. The benefits of Traditional IRAs are well known. Besides the tax deductible contributions, the earnings grow tax deferred and are only taxed upon withdrawal usually in retirement when people are in a lower tax bracket. People under 50 are permitted to contribute up to $5,500, while those 50 and older are allowed to contribute up to $6,500. At an effective tax rate of 20%, those contributions would result in a $1,100 to $1,300 savings per person. However as with all tax benefits, there are some limits.
First, in order to contribute, you or your spouse must have earned income (i.e. wages, salaries, commissions) in 2016 that exceeds the contribution amount (see your tax advisor for details). Income from pensions, annuities, dividends, and interest do not qualify. Second, you must be under the age of 70 ½ to contribute. Third, your ability to deduct the contribution is dependent on whether you were covered by a retirement plan (i.e. 401k, 403b, etc.) in 2016.
If you ARE NOT 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, 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.
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 discuss your tax planning strategy and how we can help.
*Source: Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs)
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