Photo by Amy Hirschi on Unsplash
2023 may be over, but you still have time to reduce your 2023 tax bill.
IRA contributions made between now and April 15th may be counted as a tax-deductible IRA contribution for the previous tax year. In this case, that would be 2023. In many cases, IRA contributions are tax deductible, reducing your tax bill for the previous tax year.
Anyone with earned income may contribute to an IRA. Earned income includes wages, tips, salaries, and other forms of income paid for work that you did. This includes money you made from your small business, side gig or other forms of self-employment.
The maximum IRA contribution for 2023 is 100% of your earned income or $6,500, whichever is less. If you are age 50 or older, you may contribute an extra $1,000 as a catch up contribution. Contribution limits for everyone are bumped up another $500 for this year - 2024.
If you are married, your spouse may also contribute up to the maximum amount to his or her IRA even if they did not have earned income. So effectively, a married couple may contribute up to $13,000 ($6,500 each) to their IRAs, plus any catch up contributions.
If cash flow permits, you may complete your 2023 contribution ($7,000 if you are 50 or older) AND also your 2024 contribution of $7,500 between now and the April 15 deadline.
Pro tip #1: Parents of college students who are candidates for need-based financial aid may be able to contribute up to $26,000 + catch up contributions ($6,500 per parent for 2023 AND 2024) prior to completing the FAFSA form. This reduces the amount of your assets subject to the Student Aid Index and could increase your eligibility for need-based financial aid. The key is to complete your IRA contributions before you submit the FAFSA form.
Tax savings add up. Assuming a 22% Federal marginal tax bracket, contributing $7,000 to an IRA would reduce your 2023 tax bill by $1,540 ($7,000 x .22). If you live in MN or another state with an income tax, the savings would be even more.
Pro Tip #2: Contributing to a tax-deductible IRA lowers your Adjusted Gross Income or AGI. Lowering the AGI not only reduces your taxable income, but it may also qualify you for other income related benefits like the American Opportunity Tax Credit, health care subsidies, and other tax benefits that are based on Adjusted or Modified Adjusted Gross Income.
Not all IRA contributions are tax deductible. Everyone with earned income may contribute to an IRA, but not everyone may deduct those contributions from their taxable income. It all depends on your income for the year and whether you participate in an employer-sponsored retirement plan like a 401(k) or 403(b).
Your tax preparer or tax software should be able to tell you how much, if any, of your contribution is tax deductible.
For married couples who file their taxes jointly, you may deduct 100% of your IRA contributions if your Adjusted Gross Income is $116,000 or less AND you participated in (or had access to) a retirement plan at work. You receive a partial deduction if your AGI is between $116,001 and $136,000. If your AGI exceeds those amounts, sadly, no deduction for you.
The deductibility limits vary based on marital status and how you file your taxes. For more complete details, check out this table from the IRS website: 2023 IRA Deduction Limits.
If you are NOT covered by a retirement plan at work, but your spouse is, different limits apply. For a married couple filing taxes jointly, the income phaseout begins at $218,000 and ends at $228,000. Again, for specific details talk to your tax preparer or go directly to the IRS website for more information.
Don’t delay. The IRS rules state that you may contribute to your IRA for the previous year up to “your tax return filing deadline – not including extensions”. This year, that means April 15th. Contributing to your IRA by the deadline means the money needs to be in your IRA by the deadline. Depending on how strict your IRA custodian is, mailing a check at 4:00 in the afternoon of the 15th will likely result in a missed deadline.
My advice: mail your IRA check or drop it off at your financial advisor’s office by April 1, to avoid any problems. Use your tax savings to help fund next year’s IRA and save even more.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.