Are you interested in reducing your 2021 tax bill and building your retirement savings? There is a unique tax-saver option that some individuals can take advantage of. You can save for retirement by contributing to your IRA while reducing your tax liability simultaneously. Depending on your situation, your IRA contributions may be entirely or partially tax-deductible.
Taxpayers have until the due date of their 2021 tax return to make a contribution to the IRA. This means you have until April 15, 2022. It is important to note that the six month automatic filing extension for October 17 doesn’t allow for extra time for IRA contributions.
For IRAs, the maximum a taxpayer can contribute for the 2021 year is $6,000. If you are 50 and older then you can contribute an additional $1,000 for a total of $7,000. If you have more than one IRA account, then the maximum can be split up among multiple IRAs. IRA contributions are tax deductible, however, the deduction is phased out if the taxpayer (or your spouse) actively participates in an employer-sponsored retirement plan such as a 401K as well as if your modified adjusted income (MAGI) exceeds the threshold allowed
If you and your spouse do not have a retirement plan through your employer, then you will be able to capture the full tax savings. If you do have an employer-sponsored retirement plan you should be aware that if your MAGI is less than $68,000 for 2021, you can deduct the full amount. Otherwise, the phase-out range for single filers is between $66,000 and $76,000. For joint filers, the phase-out range is $105,000 and $125,000. If only your spouse has a 401(k) account then the phase-out range is between $198,000 and $208,000.
For example, if you are a 45 year old single filer with a 401(k) employer plan and your MAGI is $71,0000 for 2021 then you can deduct 50% of a $6,000 contribution. In other words, you can deduct $3,000.
It is important to note that IRAs can be a good supplement to an employer-sponsored retirement plan. The best part is that if you qualify for IRA contribution deductions, you can take advantage of a unique tax strategy. For example, if you file your 2021 tax return early and claim a deduction for an IRA contribution you haven’t made yet, then you can use the resulting tax refund to make a contribution. Just a reminder, you must make a contribution prior to the due date of your 2021 tax return.
In conclusion, start taking advantage of this unique tax saving opportunity. It may sound too good to be true, however, there are no concerns with the IRS as they even created Form 8888, Direct Deposit of Refund, which makes it simple for taxpayers to use a portion of their tax refund as a contribution to their IRA.
