As we deal with the end of tax filing season, make sure you haven’t overlooked one of the best ways to cut your tax bill and secure your future — funding a habitual IRA. (There is no upfront tax break for funding a Roth IRA.)
You can make an IRA role for the 2020 tax year up until the tax return filing deadline, which is May 17 this year. That doesn’t leave much time, but if you have some extra income – say, from a spur check – go ahead and deposit it into an IRA account now before time expires. (Just make sure the IRA authoritative knows it’s for the 2020 tax year.)
And what about those tax savings? Well, depending on your income, you may be able to deduct your IRA role on your 2020 return. To say to a habitual IRA, you or your spouse must have earned income from a job. But, if not, you may be able to deduct donations to an IRA even if you or your spouse are covered by another retirement plot at work. Plus, early last year, seniors age 70½ and older with earned income can say to a habitual IRA, too.
Here’s some more excellent news: The IRA deduction is an “above the line” adjustment to income, meaning you don’t have to itemize your deductions to claim it. It will reduce your adjusted yucky income (AGI) dollar-for-dollar, lowering your tax bill. And your lower AGI could make you eligible for other tax breaks, which are tied to income limits.
Who Qualifies
If you’re single and don’t participate in a retirement plot at work, you can make a tax-deductible IRA role for 2020 of up to $6,000 ($7,000 if you’re 50 or older) in any case of your income. If you’re married and your spouse is covered by a headquarters-based retirement plot but you’re not, you can deduct your full IRA role as long as your joint AGI doesn’t top $196,000 for 2020. You can take a partial tax deduction if your collective income is between $196,000 and $206,000.
But even if you do participate in a retirement plot at work, you can still deduct up to the maximum $6,000 IRA role ($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 jointly). And you can deduct some of your IRA role 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 small or no earned income for 2020 can also make an IRA role of up to $6,000 ($7,000 if 50 or older) as long as their spouse has ample earned income to cover both donations. The role is tax-deductible as long as your household income doesn’t exceed the limits for married couples filing jointly.
Double Tax Break
Some low- and moderate-income taxpayers get an extra break for contributing to an IRA or other retirement account.
In addendum to the usual IRA deduction, you may qualify for a Retirement Savers tax credit of up to $1,000 for donations to an IRA or other retirement tax plot. (A tax credit, which reduces your tax bill dollar-for-dollar, is more vital than a deduction, which merely reduces the amount of income that is taxed.)
The actual amount of the credit depends on your income. It ranges from 10% to 50% of the first $2,000 contributed to an IRA or other retirement account. To be eligible, your 2020 income can’t exceed $32,500 if you’re single, $48,750 if you’re the head of a household with dependents, or $65,000 if you’re married filing jointly. The lower your income, the higher the credit. But you can’t claim the Retirement Savers credit if you’re under 18, a student, or can be claimed as a needy on someone else’s tax return.
File an Amended Return
What if you already filed your 2020 tax return? No problem – just file an amended tax return after May 17 to claim your new or augmented tax breaks. You commonly have three years from the date you filed your first return or two years from the date you paid any tax due to file an amended return (go with whichever date is later).
Use Form 1040-X to file an amended return. You can mail in a paper return or file electronically. We urge e-filing your amended return, since it will be processed much quicker. If you’re varying your IRA deduction, make sure you write “IRA deduction” and the amount of the boost or fall in Part III of the form. Once you file an amended return, you can track its status online using the IRS’s “Where’s My Amended Return?” tool or by calling 866-464-2050.