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  • Christian Bishop CFP®, EA

Haven’t filed your taxes yet? You’re a genius!

Tax filing deadline is fast approaching!  If you are like me, you still haven’t got your taxes done and probably won’t until the last possible moment.  The bad news is, you probably owe and are holding off filing so that you can make the payment on the last possible day. I know that I can e-file the tax return earlier and make the actual payment by the last day, but come on, who does that?  The good news is that you still may be eligible to make a tax-deductible contribution to an IRA for tax year 2018, potentially reducing what you owe.   By putting off your tax filing obligations you may have inadvertently made yourself  look like a tax filing procrastinating genius, as you potentially could save thousands of dollars off of your tax bill.  How is this possible?  2018 came and went and you thought all tax related matters started and ended in the calendar year, right?  For the most part this is true. But there is one simple thing that many people can do after the tax year is over that potentially could retroactively reduce their taxable income. Simply, make an IRA contribution and have it applied to the prior tax year,  in this case 2018.

When making an IRA contribution for a prior year, several factors need to be considered.  First, does it make sense for your financial situation?  Second, are you eligible?  The first question is fairly simple in my mind, “yes”.  While there are mitigating circumstances that would change that answer to a “no”, for most, saving for retirement is a good thing.  For some people, making a Roth IRA contribution may be better for their overall financial plan, but for this discussion I am going to stick with tax deductible or pre tax IRA contributions and save the discussion for Roth versus traditional IRA merits for a future article.  The second major consideration is to ensure that you are eligible to make a tax- deductible IRA contribution in the first place.  

This may be where the eyes glaze over and you skim to the bottom of the article.  Don’t worry, you can read over this section again later.  Eligibility includes factors such as having earned income from employment or net self-employment income equal to or greater than the contribution you are making.  In other words, your income cannot come solely from investment or passive income. There are also potential income barriers that may limit your deductible contributions depending on certain factors.  If you do not have an employer sponsored retirement plan such as a 401K, 403B or similar plan or if you are married and your spouse doesn’t have an employer type plan then, these limits do not apply.   If however you have an employer sponsored plan, your income cannot be over 63K for a single filer and if you have a spouse with a plan at work too, the limit is 101K.  If you are below these amounts, you may potentially receive the maximum deduction.  Income over these amounts will limit the deduction and completely eliminate it if your income is over 73k for single and 121K if joint.  What if one spouse has a plan at work and the other doesn’t?  Then it gets a little more confusing as a separate formula applies that could potentially limit or eliminate the deduction.  The phase out starts at 189K and all deduction is eliminated at 199K.  These amounts are for tax year 2018 and are adjusted each year by the IRS based on complex inflation formulas.  As you can see, if you read this far, it can be a little complicated.  The good news is that most software will do these calculations for you, or you can ask your tax preparer to run them.

The potential savings are significant.  For 2018, the maximum contribution amount is $5,500 if you are under 50 and $6,500 if you are 50 or older.  Doing some basic calculations, or allowing your software to do the calculations, it is possible that you could save thousands.  For example, assume that you are single and in the 22% federal tax bracket and live in a state such as Maine that allows for this type of deduction, you may have a combined tax rate of 29% or more. At a combined 29% tax rate you could save $1,595 in combined federal and state taxes if you made a $5,500 contribution.  If you were married and made a combined $11,000 contribution, your tax savings would be $3,190!  It gets even better if your income  is below certain thresholds as you may also be eligible for the Retirement Savings Contribution Credit which could potentially add your tax savings.  Obviously, those in higher tax brackets may save more in taxes and those in lower tax brackets may save less in taxes.

Keep in mind a few important details regarding this strategy.  You must have earned income, you must be below the various thresholds discussed earlier, you must make the contribution by your tax filing deadline without extensions and you must designate the contribution for the prior year with your IRA custodian or financial institution.  If you are a business owner, you potentially have more options available to you, with deadlines that can include extensions and contribution limits that can be higher than discussed earlier.

So, you tax filing procrastinating genius: good for you for waiting until the last moment. Go make that IRA contribution!

Christian Bishop CFPⓇ, EA EA: Enrolled to practice before the IRS CERTIFIED FINANCIAL PLANNER™ practitioner


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