Everybody likes to be surprised with a large tax refund, and there's more than one way to get them. If you're eligible, the tax break for traditional individual retirement accounts is an adjustment to income, or an above-the-line deduction. You get to claim it even if you don't itemize.
Just because you put money in a traditional IRA doesn't mean it's going to save you money: Only taxpayers who qualify can deduct IRA contributions. You're always eligible if you and your spouse don't participate in a retirement plan at work. If either of you does participate, your modified adjusted gross income must fall below the annual limits. The limits also include a phaseout range. If you fall in it, it lowers your maximum deduction. If you're over the limits, you can't deduct any contributions so it won't save you anything on this year's taxes.
The end of the calendar year doesn't mean you've missed your chance to let your IRA increase your refund. You have until the tax-filing deadline, not including extensions, to get money into the IRA. That deadline is usually April 15 unless that date falls on a weekend or holiday. If you're contributing after the end of the year, you'll have to take the extra step to tell the bank it's for the prior year, not the current one.
Deduction Tax Savings
There's a direct connection to how much you make and your IRA tax savings - the higher your bracket, the more your contribution will increase your refund. For example, as if 2012, the maximum contribution was $5,000. If you make the maximum contribution and fall in the 33 percent tax bracket, you'll save $1,650. However, if you're only in the 10 percent bracket, you'll only save $500.
Retirement Savings Credit
You might qualify for the retirement savings credit if your modified adjusted gross income falls below the annual limits for your filing status. The credit is 10 to 50 percent of up to $2,000 of contributions for a maximum credit of $1,000. You have no shot at this if you're a full-time student or if you can be claimed as a dependent.
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- How do I Use a Traditional IRA for a First-Time Home Purchase?
- Traditional IRA vs. SEP
- How to Calculate the Taxable Portion of a Traditional IRA Distribution
- Traditional IRA vs .Rollover IRA
- How Does a Coverdell ESA Differ From a Traditional IRA?
- Tax Liability on Traditional IRA Distribution