If you are in the middle of your tax preparation and owe more than you would like, fear not. There is an easy and simple trick to pushing your tax return in your favor, whether you owe or not. Best of all, you get to keep the money on both sides.
1. Drop some money into your IRA
Individuals, couples, and couples filing individually have until April 15, 2015 to 
contribute to a traditional individual retirement account, also known as an IRA, for the 2014 tax year. This also includes Roth IRAs. Depending on your current financial circumstances, you may be able to put in a large enough amount that could result in a tax deduction that could translate into thousands of dollars in extra savings. And as mentioned before, the money you put into the IRA belongs to and your family.
2. Tax Preparation Tip: IRA Contribution Limits
As with all good things, there are limits to how much you can contribute to your IRA in any given year. For tax years 2014 and 2015, your total contributions to your IRA or IRAs cannot be more than $5,500 if you are under age 50. You may contribute up to $6,500 if you are over 50. Of course, you can contribute as much as you want to your retirement, however these amounts are all Uncle Sam will allow you to deduct per year. The bad news is if you contribute more than these limits, an additional tax will apply and is six percent of the excess amount that you contributed, i.e. $6 for every extra $100 over the maximum limit you put in.
There is good news though: rollover contributions and qualified reservist repayments (for members of the military) do not count towards the maximum limit.
3. Tax Preparation Tip: IRA Contribution Facts
There are other facts regarding IRA contributions that you need to consider before pushing forward with this strategy.
- You must be under age 70 and six months at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA. You don’t pay taxes when withdrawing from a Roth IRA if you do it after age 59 and six months. Traditional IRA money is taxed when it is withdrawn.
- Income requirements – You or your spouse needs to have some sort of tax claimable income when using the contribution deduction. This can include salary, hourly wages, tips, and even alimony.
- Even if you are in the lowest tax bracket, aka the one where you pay 15%, you can still deduct up to $975 off this year’s taxes by using this tip.
- You don’t have to wait for the end of the tax year to do this. You can contribute to your traditional or Roth IRA at any time during the year, and many banks can automatically make contributions on your behalf.
- The form used to show how much is contributed into an IRA is Tax Form 5498.
- Although you may have multiple IRA accounts, the maximum deductible amount does not change. If you are an individual with two IRAs and contribute $5,500 to each in one tax year, you can only deduct $5,500. The other $5,500 will be taxed.
4. Tax Preparation Tip: IRA Contribution vs. Pension
What if you have a retirement plan or pension at work? You and your spouse can still contribute to a traditional or Roth IRA and deduct the amount whether or not you participate or have an employer contribute to another retirement plan. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse contributes to another retirement plan at work, depending on the circumstances. Even Roth IRA contributions and deductions might be limited if your income exceeds a certain level.
5. Tax Preparation Tip: Check out the IRS
If you want to learn more about IRAs and contribution limits for 2014 and 2015, click here.
Tax Preparation in Houston
And if you are in need of expert tax preparation services in Houston or the surrounding area, please contact me.