With tax season in full swing, the Internal Revenue Service wants taxpayers to be sure they’re not overlooking ways they could lessen their tax liabilities. To take advantage of one method, though, taxpayers have to be fairly quick, because there’s a deadline to meet.
The road to deductions in this case is through contributions to an Individual Retirement Arrangement (IRA) made through April 18.
How do taxpayers qualify for IRA deductions?
By definition, an IRA is a personal savings plan, letting employees and the self-employed save for retirement and enjoy some tax advantages. Contributions can be made for 2021 to a traditional IRA or to a Roth IRA until the filing deadline of April 18, but the contributions have to be designated for 2021 to the financial institution.
Eligible taxpayers can contribute as much as $6,000 to an IRA for the 2021 tax year in most cases. If the taxpayer is age 50 or older, the limit goes up to $7,000.
Qualified contributions to traditional IRAs can be deductible right up to the contribution limit, or 100% of the taxpayer’s compensation, whichever is less.
While there used to be an age limit for making a contribution to one’s IRA, that’s no longer the case.
Taxpayers may be able to claim the Saver’s Credit, if they make qualified contributions to one of a specific group of retirement plans; this includes a 401k, 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account.
The amount of the credit—also known as the Retirement Savings Contributions Credit—is usually based on how much money the taxpayer contributes, their adjusted gross income and filing status.
The lower the income, the higher the amount of the tax credit. While taxpayers are eligible for the credit, dependents and full-time students aren’t.
Read Publication 907, Tax Highlights for Persons with Disabilities, for more information on annual contributions to an ABLE account.
There are different rules for Roth
Contributions to a Roth IRA aren’t deductible, but this type of IRA carries a different kind of benefit, allowing qualified distributions that are tax-free.
Taxpayers can make contributions to their own traditional IRA and/or Roth IRA, even if they already participate in a retirement plan sponsored by their employer. This includes SEP or SIMPLE IRA-based plans.
The IRS website has more information on contributions to retirement plans and possible deductions, including:
- The Tax Time Guide
- Publication 17, Your Federal Income Tax (For Individuals)
- Retirement Plans FAQs Regarding IRAs
- Do I Qualify for the Retirement Savings Contribution Credit?
- Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)