December 31st came and went, so now it is time to file your 2012 tax return. You may have plugged the numbers into TurboTax and not liked what you found. Is there any way to reduce your tax liability for 2012 now that we are in 2013? Yes there is!
IRA contributions can be made for the previous year until tax filing day of the current year
You can contribute $5,000 ($6,000 if 50 or older) to a Traditional IRA or Roth IRA for 2012 until April 15th, 2013. This means that if you forgot to contribute to your IRA, you can still do so.
Should I contribute to a Traditional or Roth IRA?
If you want to reduce your tax liability for 2012, then you will need to contribute to a Traditional IRA. Remember, Traditional IRA contributions are tax deductible, while Roth IRA contributions are not, however money will come out of the Roth IRA tax free in retirement. If you are in a low tax bracket, are getting a refund, or your income is too high for a Traditional IRA, you should consider contributing to a Roth IRA.
Are there income limitations for contributing to a Traditional IRA?
Yes there are, and they are complicated. If you have a retirement plan at work, such as a 401(k), then the Adjusted Gross Income (AGI) limitations are:
Single: $58,000
Married Filing Jointly: $92,000
Married Filing Separately: $10,000 (The IRS really dislikes MFS filers… sorry…)
If you do NOT have a retirement plan at work, and neither does your spouse, there are no income limitations.
If you do not have a retirement plan at work, but your spouse DOES have one, then the AGI limitation is $173,000.
Client Case Study
I have a client that files Married Filing Jointly. They had around $150,000 AGI for 2012, and the husband has a 401(k) through his employer. The wife is a stay at home mom with limited earnings for 2012. The wife can contribute $6,000 (is over age 50) to a Traditional IRA, however the husband can’t. They will save about $1,649 in taxes for 2012 by contributing $6,000 to her Traditional IRA.
You must have earned income to contribute to an IRA. However, a spouse without income can use their spouses earnings to make contributions!
Bonus Tax Credit
If you are in a low income tax bracket, you may also be eligible for the Retirement Savers Tax Credit. Depending on your income and filing status, you could get a tax credit of 10% – 50% of your IRA contribution. This means if you contribute $5,000 to a Traditional IRA, you will get the tax deduction, as well as a tax credit worth $500 – $2,500! Click here to learn more about the tax credit.
Are you going to be making an IRA contribution for 2012 before April 15th 2013? Feel free to ask questions in the comment section!…(read more)
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Hi, Can I deduct my contributions to my "defined benefit plan" thru work and my husband 401K in IRA deduction ? and get Savers Credit? Our AGI ends up being 93000
Hi, I plugged in 5500 to contribute to a traditional IRA on my taxes, getting an extra thousand for it but my question is my girl friend's cpa said she only needs to put in 1700 on hers to get the same result of a thousand back, is the table different for everyone or could I have just done the same, thanks.
Hey Dale, my understanding is that since pensions are mandatory and don't involve employee contributions, it doesn't stop could as a retirement account. You should still be able to contribute to a Traditional IRA this year. You can double check this with your accountant just to be 100% sure.
My wife is a school teacher (Ohio) and does have a pension plan (STRS). However, she does not have a 403B or 401K plan at work. Can I contribute to a traditional IRA and still lower our tax liability? Combined income is $103,000 annually.
Based on current tax law, once you start making $200k you will no longer be able to contribute to a Roth IRA, however your existing Roth will be able to grow tax-free. Depending on your employer retirement plan, Roth IRA's have higher income thresholds than Traditional IRA's, so you might not be able to contribute to either. But as we know these things change, so I recommend focusing on today, and your best option may be to fully fund your Roth IRA.
Quick question. I think about opening a roth Ira as I qualify for the income limits, but as a college student going for a master, I think I'll be in a high tax bracket later in life. So lest say In 10 years I make 200k would I still qualify for the Roth IRA or what I have to open up a traditional IRA? Thanks
Hey Sam, unfortunately since you both have access to a retirement plan through work, your AGI would need to be below $112,000 to qualify for a Traditional IRA. The news isn't all bad though! You still qualify for a Roth IRA, so even though you wouldn't get a tax deduction for 2012, you would be able to take money out of the Roth IRA in retirement tax free.
Shoot me an e-mail if you would like to discuss this option further.
Good Morning Alan, we are married filing jointly and our AGI is 159K. We both have 401(K) and contribute max out. Do we still qualify for IRA Traditional? We want to reduce Tax. Thank you.
Alan, our AGI is above $92k but below $173k ($183K for her) so she should get a full $6k deduction….Thank you very much Alan!
If your joint AGI was below $92,000 then she could contribute $6,000 ($5,000 contribution + $1,000 catch-up contribution) to a traditional IRA. Her $1k contribution to her retirement plan through work will not affect her ability to contribute to an IRA. Hope this helps!
Hi Alan, we are married filing jointly, my wife is over 50 y/o and had 2 jobs in 2012. The 1st one offered retirement plan and she contributed about $1k then got laid off, the 2nd one didn't offer any retirement plan. Now she has two W2's, one with box 13 checked and not the other. I've worked the IRA deduction worksheet and it came out that she can contribute up to $6k. Can she contribute up to $6k since she already contribute $1k to one of her job? or she has to deduct that $1k from the $6k?
Contributions to IRA are deductions, not tax credits. This means if you contribute $3,000 to a Traditional IRA and are in the 25% tax bracket, you will reduce the taxes you own by $750. If you are lower income, you might qualify for the Retirement Savers Tax Credit which is a tax credit, so you would receive a dollar for dollar tax reduction.
Alan, Nice tip. Is the contribution a dollar for dollar phaseout for tax? I have rental income and will likely owe in taxes this year. I rather pay myself first for retirement then pay the gov. For example sake, if I owe 3K to the Fed. Could I stick 3K into a traditional IRA and reduce my tax liability to zero? Or will a percentage of my IRA contribution phase out the liability?
if I did it correctly ,which I believe I did we should get 400.00. turbo tax consultant says we do qualify and dont understand why we didnt get it.I did fill out form 8880 and that states 400 also
Very good question. The Retirement Savers Credit is not a refundable credit, which means it can take your tax liability to $0, but that's it. So if you owe $750 in taxes, but qualified for $1,000 credit, you will simply not owe any taxes, but you do not get back the remaining $250.
You should see it on line 50 of your 1040. You can dig in and look at Form 8880 to see the actual calculation.
ON turbo tax my husband and I qualify for saver credit but didnt get it Why?