There is still time to fund your IRA and lower your taxes
As the end of tax filing season approaches, make sure you don’t overlook one of the best ways to lower your tax bill and secure your future: funding a traditional IRA. (There is no initial tax relief for funding a Roth IRA.)
You can make an IRA contribution for the 2020 tax year until the tax return filing deadline, which is May 17 of that year. That doesn’t leave much time, but if you have extra income – say, from a stimulus check – go ahead and deposit it into an IRA account now before the deadline expires. (Just make sure the IRA administrator knows it’s for tax year 2020.)
And what about those tax savings? Well, depending on your income, you may be able to deduct your IRA contribution on your 2020 return. To contribute to a traditional IRA, you or your spouse must have earned income from a job. But otherwise, you may be able to deduct contributions to an IRA even if you or your spouse is covered by another workplace pension plan. Plus, as of last year, people aged 70 and a half and over with earned income can also contribute to a traditional IRA.
Here’s some more good news: The IRA deduction is an “over the line” income adjustment, which means you don’t have to itemize your deductions to claim it. This will lower your Adjusted Gross Income (AGI) dollar for dollar, which will lower your tax bill. And your lower AGI could make you eligible for further tax breaks, which are tied to income limits.
If you’re single and don’t participate in a workplace retirement plan, you can make a tax-deductible IRA contribution for 2020 up to $ 6,000 ($ 7,000 if you’re 50 or older) regardless of your income. If you are married and your spouse is covered by a workplace pension plan but you are not, you can deduct your entire IRA contribution as long as your joint AGI does not exceed 196 $ 000 for 2020. You can take a partial tax. deduction if your combined income is between $ 196,000 and $ 206,000.
But even if you participate in a workplace retirement plan, you can still deduct up to the maximum IRA contribution of $ 6,000 ($ 7,000 if you’re 50 or older) if you’re single and your income is $ 65,000. or less ($ 104,000 if married filing spouse). And you can deduct a portion of your IRA contribution if you’re single and your income is between $ 65,000 and $ 75,000, or if you’re married and your income is between $ 104,000 and $ 124,000.
Spouses with little or no earned income for 2020 can also make an IRA contribution of up to $ 6,000 ($ 7,000 if 50 or older) as long as their spouse has sufficient earned income to cover both contributions. The contribution is tax deductible as long as your household income does not exceed the limits applicable to married couples declaring jointly.
Double taxation reduction
Some low and moderate income taxpayers get an extra break to contribute to an IRA or other retirement account.
In addition to the usual IRA deduction, you may be eligible for a retirement savings tax credit of up to $ 1,000 for contributions to an IRA or other retirement tax plan. (A tax credit, which cuts your tax bill by dollar for dollar, is more valuable than a deduction, which only reduces the amount of income taxed.)
The actual amount of credit depends on your income. It ranges from 10% to 50% of the first $ 2,000 paid into an IRA or other retirement account. To be eligible, your 2020 income cannot exceed $ 32,500 if you are single, $ 48,750 if you are the head of household with dependents, or $ 65,000 if you are jointly married. The lower your income, the higher the credit. But you can’t claim the retirement savings credit if you’re under 18, a student, or can be claimed as a dependent on someone else’s tax return.
File an amended return
What if you have already filed your 2020 income tax return? No problem – just file an amended tax return after May 17 to claim your new or increased tax breaks. You usually have three years from the date you filed your initial return or two years from the date you paid any tax due to filing an amended return (choose the later date) .
Use Form 1040-X to file an amended return. You can mail a paper return or file it electronically. We recommend that you file your amended return electronically, as it will be processed much faster. If you change your IRA deduction, be sure to write “IRA deduction” and the amount of the increase or decrease in Part III of the form. Once you file an amended return, you can track its status online using the IRS “Where is my amended return?” tool or by calling 866-464-2050.