If you have not filed your 2014 tax return, you can reduce your tax bill by making a contribution to your individual retirement account (IRA). An IRA allows you to save for your retirement and also save on your taxes. You may also be eligible for a tax credit equal to a percentage of the contributions you make.
The money you put in your traditional IRA, including earnings, is usually not taxed until they are withdrawn and distributed to you. Qualified distributions from a Roth IRA are tax-free.
Here are some important points that you may want to consider before making a contribution to your IRA before Tax Day:
1. To count towards tax year 2014, you can make a contribution to your IRA up until April 15, 2015 (extensions to file cannot be used). If you make a contribution between Jan and April this year, make sure that your plan sponsor applies it to 2014. You can also choose to apply the contribution to 2015.
2. You must be under 70½ years of age at the end of the tax year to contribute to a traditional IRA. To contribute to a Roth IRA, there is no age limit.
3. You must have taxable compensation such as wages, commissions, tips, bonuses, etc. The IRS also considers net income from self-employment, taxable alimony and separate maintenance payments received by you as compensation.
4. For 2014, the maximum that you can contribute is $5,500 or your taxable compensation for the year, whichever is smaller. If you were 50 years old or older at the end of 2014, then the limit increases to $6,500. If you contribute more than that, an additional 6% tax is charged on the amount that is in excess of the limit.
5. If you file jointly and contribute to an IRA, you may use a Saver’s Credit to reduce your tax bill for up to $2,000. To claim this tax credit, use Form 8880, Credit for Qualified Retirement Savings Contributions.
6. To deduct some or all of your traditional IRA contributions, use the worksheets in Form 1040 or Form 1040A. Contributions to a Roth IRA may not be deductible.