No doubt that you’re at least thinking about gathering your financial information needed to file your 2014 tax return. Well, add this article to the pile because here are potentially hundreds of dollars’ worth of tax-saving strategies.
Max out your IRA contribution. You have until April 15, 2015 to contribute to a traditional IRA and take a deduction on your 2014 tax return. You are allowed to contribute 100% of earned income up to $5,500 or, for those of you age 50 or older in 2014, you may contribute an additional $1,000 ($6,500 total) known as a ‘catch-up’ contribution. Here are a few nuances you need to be aware of:
- If you are eligible for a 401k or similar qualified retirement plan through your job, you may contribute the maximum to your IRA until your modified adjusted income (MAGI) reaches $60,000 for single tax filers ($96,000 for joint tax filers).
- You are allowed a partial deduction with MAGI between $60,000 – $70,000 for single filers and $96,000 – $116,000 for joint filers.
- With MAGI above $70,000 for joint filers or $116,000 for joint filers, your IRA contribution is not deductible.
- If you don’t have access to a qualified retirement plan at work but are married to someone who does, you are eligible to contribute the maximum to a deductible IRA until your modified adjusted income exceeds $181,000. A partial deduction is allowed for MAGI between $181,000 – $191,000.
- You cannot contribute to a traditional IRA beginning the year you reach age 70 ½.
By way of example of the tax benefits, let’s assume a couple, who are both over the age of fifty, each contributes the maximum $6,500 to his and her IRA ($13,000 total). Assuming a 28% tax bracket, they would receive a tax benefit of $3,640. A different way to look at it is that your $13,000 investment only costs you $9,360!
Invest in a Roth IRA. Ok, you don’t get a tax deduction but you do get tax deferred growth and future withdrawals during retirement are tax free! Unlike a traditional IRA, Roth IRA’s do not have Required Minimum Distributions. The same maximum contribution limits apply for Roth IRAs as for traditional IRAs: 100% of earned income up to $5,500 plus an additional $1,000 for those ages fifty or older. Here are the details:
- You’re eligible for a full contribution for MAGI up to $114,000 for single filers ($181,000 for joint filers).
- A partial deduction is allowed if MAGI is between $114,000 – $129,000 for single filers ($181,000 – $191,000 for joint filers).
- No contribution allowed if MAGI is above $129,000 for single filers ($191,000 for joint filers).
- April 15, 2015 is the deadline for contributions.
Don’t forget the Retirement Savings Contribution Credit. This tax credit is designed to help low to middle income workers save for retirement. In addition to the tax deduction you receive for contributing to an IRA or company qualified retirement plan, you receive a tax credit worth between 10% and 50% of the contribution amount up to $2,000 for single filers ($4,000 for joint filers). This credit is reserved for single filers whose adjusted gross income is below $30,000 and joint filers with adjusted gross income below $60,000. For example, a couple whose adjusted gross income was $36,000 in 2014 and who contributed $6,000 to a 401k plan, would receive a $2,000 tax credit (50% of a maximum $4,000) in addition to the tax deduction for the contribution.