Looking for a way to reduce your 2012 tax bill? If you have earned income and meet certain other requirements, you might want to consider making a contribution to an individual retirement account (IRA). It’s not too late; IRA contributions must be made on or before April 15, 2013 for a deduction on your 2012 1040.
If you do not receive any earned income, you are not able to make an IRA contribution. The good news for married taxpayers is the earned income for one spouse can be counted as earned income for the non-working spouse. IRA contributions are limited to the greater of earned income or $5,000 per year. For example, Mark is employed at ABC Corporation and earns $50,000 annually. His wife, Cindy, is a stay at home mom and does not have earned income. Assuming Mark & Cindy are under age 50, they would be entitled to make a $5,000 IRA contribution for Mark and a $5,000 IRA contribution for Cindy. An additional “catch-up” contribution of $1,000 per year is allowed for taxpayers age 50 and over. If you are not a participant in an employer sponsored retirement plan and have earned income, you are entitled to make a tax-deductible IRA contribution.
If you are a participant in a company sponsored retirement plan, your IRA contribution may not be deductible depending on your filing status and adjusted gross income. In 2012, for single filers, the deduction is phased out between $58,000 and $68,000 of adjusted gross income. For couples filing jointly both covered by employer retirement plans, the deduction is phased out between $92,000 and $112,000 of adjusted gross income. If you are a married taxpayer and only one of you is a participant in an employer sponsored retirement plan, the phase out occurs between $173,000 and $183,000 of adjusted gross income. In our example above, if Mark were a participant in ABC Corporation’s retirement plan, he would still be able to make a deductible IRA contribution because his income is below the threshold amount of $173,000.
Dollar for Dollar?
No, the contribution to an IRA does not reduce your tax liability dollar for dollar. Many taxpayers are disappointed to find this out. However, it is always smart to contribute to your retirement funds and making an IRA contribution has many non-tax benefits. Funds held in an IRA grow tax-deferred for as long as you keep the account. Contributing to an IRA is an excellent way to promote your personal savings goals. IRAs can also offer investment style flexibility: you select the investment options best suited to your needs.