It’s not too late to reduce your 2015 tax bill. Retirement savers continue to have a powerful option to decrease the amount they owe in federal income tax, if they are willing to deposit money in an individual retirement account. Depending on your tax rate, a last-minute IRA contribution could save you hundreds or even over $1,000.
The higher your tax bracket the more you save. You can defer paying income tax on up to $5,500 that you contribute to an IRA. “That $5,500 deduction is going to either lower your tax bill or bump up the refund you are owed,” says Trent Porter, a certified financial planner for Priority Financial Partners in Denver. “A lot of tax programs can give you that hypothetical of how much more your refund will be if you contribute X amount of dollars to an IRA.” Maxing out your IRA will reduce your tax bill by $825 if you are in the 15 percent tax bracket, $1,375 for those in the 25 percent bracket and $1,815 if you pay a 33 percent tax rate. Income tax won’t be due on this money until you withdraw it from the account.
Workers over 50 can get an even bigger tax break. People who are age 50 or older can contribute an extra $1,000 to an IRA, which will get them a larger tax deduction. If a 55-year-old worker who is in the 25 percent tax bracket contributes $6,500 to an IRA, he will reduce his tax bill by $1,625.
Double your tax break with a spousal IRA. Married couples can double their tax break by each opening an IRA in their own name. If only one spouse works and you file a joint tax return, the working spouse can contribute to an IRA in each spouse’s name. A married couple can claim a tax deduction on as much as $11,000 that they contribute to two or more IRAs. And if both spouses are 50 or older, the contribution limit climbs to $13,000. A married couple, both age 50, who are in the 25 percent tax bracket and max out an IRA in each of their names will save $3,250 on their income tax bill.
Contribution deadlines differ by state. IRA contributions that will qualify you for a deduction on your 2015 return are due by April 18, 2016. “IRA contributions can be made up until 11:59 p.m. on the tax deadline, assuming they are received in good order,” says John Boroff, director of retirement product management at Fidelity Investments. Residents of Maine and Massachusetts get an extra day to contribute due to the Patriots’ Day holiday celebrated in those states, so they have until April 19, 2016, to make 2015 IRA contributions. Several IRA providers, including Vanguard and Charles Schwab, say they won’t be able to accept online IRA contributions for 2015 after April 18 but will accept in-person contributions and envelopes postmarked by April 19 from residents of Maine or Massachusetts.
You can file a tax return claiming an IRA deduction before the money is in the IRA account as long as you make the deposit by your tax filing deadline. “You could file your taxes on March 1 and tell the IRS you will make the contribution by April 15,” Porter says. “You can get your refund and use that to go toward what you are going to be putting in the IRA.” You can even deposit your tax refund directly into an IRA. When making a tax-year 2015 contribution during 2016, it’s important to specify which tax year you would like the contribution to be applied to. IRA custodians are allowed to attribute contributions to the calendar year in which they are received unless you indicate otherwise.
Claim the saver’s credit. In addition to the tax deduction on your IRA contribution, workers who earned less than $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015 are eligible for the saver’s credit. This tax credit is worth between 10 and 50 percent of the amount you contribute to an IRA up to up to $2,000 for individuals and $4,000 for couples. A couple earning $30,000 who saved $2,000 in an IRA could receive a $1,000 credit, in addition to the tax deduction for the contribution.
Don’t wait until the last minute. While contributions postmarked by the tax deadline are eligible to be counted as 2015 deductions, it’s a good idea to contribute a few days or weeks in advance to allow for processing time or to correct mistakes. And, of course, contributing early gets the money compounding on your behalf sooner. “The whole idea behind an IRA is to have tax-deferred growth of your money,” says Austin Chinn, a certified financial planner for Fountain Strategies in San Jose, California. “The sooner you put it in the longer it has to grow.”
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How to Save Over $1,000 on Your 2015 Tax Bill originally appeared on usnews.com
