Tax
& Business Alert – March 2022
539
words
Word count target: ~540 including sidebar
Abstract: It may not be too late to lower your 2021 tax bill. Qualified
individuals can still make deductible contributions to traditional IRAs until
the tax filing date of April 18, 2022, and claim the deduction for 2021. This
article provides details, including alternate strategies.
Slim your 2021 tax bill by fattening
your IRA
If you didn’t get around to
contributing to an IRA in 2021 and you’re looking for ways to lower your tax
bill, you may still have an option. Qualified taxpayers can make deductible contributions
to traditional IRAs until the tax filing date of April 18, 2022, and claim the
benefit on their 2021 returns.
Who is eligible?
You can make a deductible
contribution to a traditional IRA if:
For 2021, joint tax return
filers who are covered by an employer plan have a deductible IRA contribution
phaseout range of $105,000 to $125,000 of modified AGI. For taxpayers who are
single or a head of household, the phaseout range is $66,000 to $76,000. For
married filing separately, the phaseout range is $0 to $10,000. For 2021, if
you’re not an active participant in an employer-sponsored retirement plan, but
your spouse is, the deductible IRA contribution phaseout range is $198,000 to
$208,000 of modified AGI.
Deductible IRA contributions
reduce your current tax bill, and earnings within the IRA are tax deferred.
However, every dollar you take out is taxed in full (and subject to a 10%
penalty before age 59½, unless an exception applies).
IRAs are often referred to
as “traditional IRAs” as opposed to Roth IRAs. You also have until April 18 to
make a Roth IRA contribution, though unlike traditional IRA contributions, Roth
IRA contributions aren’t deductible. Withdrawals from a Roth IRA are tax-free
if the account has been open at least five years and you’re age 59½ or older. (Contributions to a Roth IRA are subject to income
limits.)
What’s the contribution
limit?
For 2021, if you’re
eligible, you can make deductible traditional IRA contributions of up to $6,000
($7,000 if you’re 50 or over). In addition, small business owners can set up
and contribute to a Simplified Employee Pension (SEP) plan up until the due
date for their returns, including extensions. For 2021, the maximum
contribution you can make to a SEP is $58,000.
For more information about
how IRAs or SEPs can help you save the maximum tax-advantaged amount for
retirement, contact us — or ask during your return preparation
appointment.
Sidebar
Two alternate IRA strategies
for possible tax saving
1. Turn a nondeductible Roth
IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2021?
That’s helpful in the future when you take tax-free payouts from the account,
but the contribution isn’t deductible. If a deduction is important now, you can
convert a Roth IRA contribution into a traditional IRA contribution using a
“recharacterization” mechanism. Assuming you meet the requirements, you may
then take a traditional IRA deduction.
2. Make a deductible IRA
contribution, even if you don’t work. Generally, you must have wages or
other earned income to make a deductible traditional IRA contribution. An exception applies if your spouse is the
breadwinner and you’re a homemaker. If so, you may be able to take advantage of
a spousal IRA.
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