There’s still time to reduce your 2014 tax bill by hundreds or perhaps more than a thousand dollars, if you’re willing to tuck some cash away in an individual retirement account. Here’s how you can significantly decrease the amount of taxes you owe or boost your refund by saving for retirement and investing for the future.
Maximize your deduction. You can contribute up to $5,500 to an IRA in tax-year 2014, or $6,500 if you are age 50 or older. If a worker in the 25 percent tax bracket contributes $5,500 to an IRA, he will save $1,375 on his 2014 tax bill. Those in the 15 percent tax bracket will save $825 on the same contribution, while those in the 28 percent bracket will save $1,540. A worker in his 50s or 60s who maxes out his IRA could reduce his tax bill by $1,620 if he’s in the 25 percent tax bracket. Income tax won’t be due on IRA contributions until the money is withdrawn from the account. “Sometimes people look at their taxes and see how much they would save by contributing to an IRA,” says Jim Pasztor, a certified financial planner for Pasztor and Associates in Aurora, Colorado. “If you make a contribution to an IRA and you’re in the 25 percent tax bracket, a $1,000 contribution is actually only costing you $750, and actually less if you are in a state that charges income taxes.”
Check your eligibility. Individuals who don’t have access to a retirement account at work are typically eligible to defer paying income tax on the amount they deposit in an IRA. Workers who are eligible for a 401(k) or similar type of retirement account through their job can claim a tax deduction on their IRA contributions until their modified adjusted gross income exceeds $60,000 for individuals and $96,000 for couples. A partial deduction can be claimed by people with workplace retirement accounts who earn between $60,000 and $70,000 for individuals and $96,000 to $116,000 for couples. If you don’t have access to a 401(k) but are married to someone who does, the IRA deduction begins to be phased out after your joint income exceeds $181,000 in 2014. You can no longer contribute to a traditional IRA in the year you reach age 70½ or older.
Meet the deadline. You can make 2014 IRA contributions until April 15, 2015. However, when you make a deposit between January 1 and April 15, you need to tell the financial institution which year the contribution is for. If you don’t specify otherwise, the plan sponsor can apply the contribution to the year in which it is received. You can file a tax return claiming a traditional IRA contribution before the money is in the account, but the contribution must be made by the due date of your tax return. You can even have your income tax refund paid directly to your IRA. “You have time to get the money back from the refund and use it,” says Dan Candura, a certified financial planner for PennyTree Advisers in Braintree, Massachusetts. “Just remember not to forget to fund it.”
Consider a Roth. You also have until April 15 to make Roth IRA contributions. Roth IRA deposits won’t reduce your current tax bill, but the money will grow tax-free and you won’t have to pay taxes on it in retirement. “If you think your taxes are going to be higher in retirement or you are at an especially low tax rate, the Roth looks more attractive,” says Jon King, an accountant and certified financial planner for Pegasus Financial Solutions in Austin, Texas. “If you think your tax rate is higher now, then you shouldn’t fund a Roth because the value of the tax deduction now is going to be greater than the benefit you would get in retirement.”
Get the saver’s credit. In addition to the tax deduction on your IRA contribution, you can also claim the saver’s credit. Those with incomes below $30,000 for individuals, $45,000 for heads of household and $60,000 for couples in 2014 who contribute to an IRA are eligible for a tax credit worth between 10 percent and 50 percent of the contribution amount up to $2,000 for individuals and $4,000 for couples. A couple earning $30,000 who saves $1,000 in an IRA could earn a $500 saver’s credit in addition to the tax deduction they will get for the same contribution.
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How to Reduce Your 2014 Tax Bill By Over $1,000 originally appeared on usnews.com
