Written by: Stephen Smalenberger, EA
It’s that time of year again that is affectionately referred to as “Tax Season.”
Whether you are scheduling a time with your CPA or firing up a tax software on your computer, you may be wondering what results you’ll find when the return is complete. Will you have a refund or a balance due? If you owe… how much?
At this point, what if anything can be done to impact your return?
There are a few options available depending upon whether you are self-employed or not. For now, let’s address what can be done after year-end by the general public who do not have their own business.
The Internal Revenue Service allows taxpayers who have earned income which is essentially wages from a paycheck to make a contribution(s) any time throughout the year up even until April 15th of the following year. These contributions can be made into an Individual Retirement Agreement better known as an IRA.
Depending upon your income level, the money deposited could be recognized either as a tax-deductible contribution or a non-deductible contribution.
The following is a table from the IRS which provides a summary:
If tax-deductible, the money that goes into this type of account reduces both your Adjusted Gross Income (AGI) and your Taxable Income, ultimately lowering your tax due!
If your income for the year, however, exceeds the limits as seen above, a contribution can still be made, you will just not receive the benefit of a tax deduction.
The amount that can be contributed each year is limited by one of two factors: your earned income or your age.
For the 2016 Tax Year, those under age 50 could make a maximum contribution of up to $5,500. And those between 50 and 70 1/2 are allowed an additional $1,000 “catch-up” which brings their total maximum contribution up to $6,500 for the year.
Like most areas of tax or finance, there are many rules and sometimes even exceptions. To add another layer of complexity, there is even something called a “Spousal Contribution” which allows a working spouse to make contributions on behalf of their non-working spouse into an IRA owned by that person.
In the meantime, if you are facing sticker shock of a tax balance due wondering what potentially can be done to reduce it or are considering ways to save money for retirement in a tax-efficient manner, a contribution to a Traditional IRA may be something for you to consider.
And if you don’t want to be in the same position next year, let’s talk about how we can help you plan ahead.