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Preparing for Tax Time: Last Chance to Save on Taxes

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Carletta O. Beckwith
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As tax season ends, there may be one thing you can do to reduce your tax liability.  You may be able to contribute to a traditional IRA and receive a tax deduction.   An IRA is an individual retirement arrangement that was designed to help self-employed and employees save for retirement.    Contributions are usually deductible but distributions made prematurely or after age 59 1/2 are taxable.   

The ROTH IRA is an individual retirement arrangement that permits you to contribute after-tax income up to a specified amount each year. Distributions, which include both earnings on the account and withdrawals, are tax free if received after age 59½. 

Distributions for traditional IRA’s must commence by April 1 of the year following the year you turn 70 ½, however the ROTH IRA’s do not require you to make such distributions.

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If you have yet to fund your IRA for 2016, you are not too late.  Contributions for 2016 must be made by April 18, 2017.  However, if you have a SEP or Keogh and you file an extension to October 16,2017, you have until that date to make a retirement contribution for 2016.

Making a tax-deductible IRA contribution will lower your tax bill for the 2016 tax year.

How Do You Qualify?

To qualify for the full IRA deduction, you must:

1) Not be eligible or covered by a company retirement plan, or 

2) If eligible, you must have Modified Adjusted Gross Income (Adjusted Gross Income plus tax exempt interest income) of $61,000 or less if Single or Head of Household, or $98,000 or less if Married Filing Jointly.  If your spouse is eligible for the company plan but you are not, your traditional IRA contribution is tax deductible provided your combined Modified Adjusted Gross Income is $184,000 or less.

How Much Can You Contribute?

Eligible taxpayers may contribute $5,500 if under age 50 or $6,500 if 50 or older.  Keep in mind that if you are 70 ½ at the end of 2016, you are prohibited from contributing to a traditional IRA.  There are no age restrictions for contributions to the ROTH IRA.  For self-employed individuals, the maximum contribution to Keoghs and SEP’s for 2016 is $53,000.

Even though ROTH IRA contributions will not lower your tax bill in 2016, it may be a better choice since all withdrawals (contributions and earnings) can be tax free in retirement.  To contribute the maximum of $5,500 if under age 50 or $6,500 if 50 or older, your Modified Adjusted Gross Income must not exceed $184,000 if Married Filing Jointly or $117,000 if Single or Head of Household.

How Much Can You Save?

The amount you save will vary and depends on your tax bracket.  For example, if you are in the 25 percent bracket and you make a fully deductible IRA contribution of $5,500, you could save $1,375 on your tax bill for 2016 for the first year ($5,500 X .25 = $1,375). While you would save $825 if you are in the 15 percent bracket.

Carletta Beckwith CPA LLC is a firm that provides premiere income tax preparation, tax planning, and financial planning services. Carletta Beckwith is a licensed CPA and CFP® and shares her extensive industry knowledge to deliver superior customer service and personalized attention to her clients.  To learn more about the services she provides visit www.beckwithcpa.com.

IRS Circular 230 disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.  

Disclaimer: Nothing in this document should be relied on and you should seek professional advice if you are in need of tax information or advice.  This publication should not be a substitution for personal tax advice as every tax situation is different.  You should obtain personal tax advice from a Certified Public Accountant or other tax professional to address your specific tax needs.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer. Click here to submit a Guest Column.

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