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Financial Literacy Month: It’s Not Too Late to Lower Your 2016 Tax Bill

by Wayne Titus | Apr 10, 2017   ()

It may be 2017 but it’s not too late to lower last year’s tax bill – if you act soon.

This year, with the normal filing deadline pushed a few days back from April 15 due to some interesting tax holidays, you have a few extra days to file your return, and perhaps shave off some of your payment to Uncle Sam in 2017.

As long as you act before April 18, one way you can minimize the amount of tax you owe is by making a contribution to an individual retirement arrangement account, or IRA. Depending on your income and some other factors, these benefits may take different shapes.

If you are age 18 or older, not a full-time student, not claimed as a dependent on another person’s return, married and make less than $61,000, you may be eligible for a retirement savings contributions tax credit. This credit returns between 10 percent and up to 50 percent of the amount of your contribution to you. This opportunity is available if you are single as well, but different income thresholds apply.

If you already have an IRA account, you can take advantage of these tax savings by simply writing a check. If you don’t have an IRA account, you can visit your banking institution to set one up fairly easily. 

After the initial account set up, there are a few things to consider. A bank may not need to consider your best interest before its own, and there may be some costs or fees associated with the account.

You may also want to use a different expert when making decisions about how to invest the money. Consider working with a professional CPA or other fiduciary to maintain the account. This type of advisor is obligated to place your interests ahead of his or her own and can offer suggestions and guidance to make sure the investment is right for you.

If you aren’t eligible for the retirement savings contributions tax credit, you may still be able to make a last-minute IRA contribution work to your advantage. Of course, when it comes to taxes, there are some important details and caveats.

If you – and if married, your spouse,– aren’t covered by a retirement plan at work, the IRA contribution is fully deductible. That means making a contribution of up to $5,500 – or $6,500 if you’re over the age of 50 – will result in a deduction of the same amount on both your federal and state taxes.

If you do have a retirement plan through work and make less than $193,000, you’re not out of luck. All or a portion of an IRA contribution made before April 18 may still be deductible on both your federal and state taxes. Again, there are additional rules to consider. Only those making $183,000 or less can deduct the amount of the entire contribution and those making less than $193,000 can take a partial deduction.

If you haven’t yet started saving with an IRA, now is the perfect time to consider it. An IRA is a good way to get a jumpstart or start saving toward your retirement, you can potentially reduce your tax obligation and you could also get a larger refund.

If you have cash on had to make a contribution before the April 18 filing deadline, the tax savings will be apparent almost immediately. If you don’t have cash on hand to make a 2016 contribution, but receive a tax refund, consider using the funds to make your 2017 IRA contribution so that you might receive similar benefits next filing season.

About the author: Wayne Titus, is a member of MICPA and the president of AMDG Financial and AMDG Business Advisory Services in Plymouth, Michigan. He can be reached at wbt@amdgservices.com.

Source: MICPA
Source: MICPA

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