Most of the time an expense that may be tax deductible needs to be paid by the end of the year for which the expense will be claimed. However, there is an exception to that rule. IRA contributions for the prior year can be made after the close of the year if made by the return’s original filing due date for the year. Thus IRA contributions for 2022 can made by April 18, 2023. Normally the due date would be April 15, 2023, but when the due date falls on a weekend or a holiday, the due date becomes the next business day. Since April 15, 2023 falls on a Saturday and Monday, April 17 is a holiday observed in Washington, D.C., the due date for 2023 returns becomes April 18. If you reside in a federally-declared disaster area the date may be extended past April 18.
There are several benefits to making an IRA contribution, the most important one being that you are putting money aside for your future retirement. The following is a rundown of the rules and tax tips relating to making IRA contributions and the potential tax benefits.
Age Rules – It used to be thatyou had to be under age 70½ at the end of the tax year to contribute to a traditional IRA. That is no longer the case after 2019, and contributions to a traditional IRA can be made at any age so long as you have earned income equal or greater than the IRA contribution. There has never been an age limit to contribute to a Roth IRA.
Compensation Rules – You must have taxable compensation, also termed earned income, to contribute to either a traditional or Roth IRA. This includes income from wages and salaries and net self-employment income. It also includes tips, commissions, bonuses, and taxable alimony. If you are married and file a joint tax return, only one spouse needs to have compensation in most cases.
Contribution Limits – In general, the most you can contribute to your IRA for 2022 is the smaller of either your taxable compensation for the year or $6,000. If you were age 50 or older at the end of 2022, the maximum you can contribute increases to $7,000. The limit applies to combined contributions to traditional and Roth IRAs, not each type. If you contribute more than these limits, an additional tax will apply. The additional tax is six percent of the excess amount contributed that is in your account at the end of the year.
Deductibility – Contributions to a traditional IRA are generally tax deductible, but the deductible amount phases out for taxpayers who are active participants in their employer’s retirement plan and whose adjusted gross income exceeds a threshold amount. (The “retirement plan” box in box 13 on your W-2 form from your employer will be checked if you are an active participant in your employer’s plan.) A higher phaseout threshold applies to unemployed spouses who make contributions based on the other spouse’s income. For 2022, the adjusted gross income (AGI) phaseout range is:
Filing Status | Phaseout Threshold | Fully Phased Out |
Unmarried | $68,000 | $78,000 |
Married Filing Jointly | $109,000 | $129,000 |
Married Filing Separately | $0 | $10,000 |
Spousal IRA | $204,000 | $214,000 |
If you can deduct the traditional IRA contribution, it will lower your AGI, taxable income and tax liability. The amount of your AGI is used to limit certain other deductions and tax credits. So deductible IRA contributions are a way to reduce your AGI and potentially increase other deductions and credits. For example, if you are obtaining your health insurance from a Government Marketplace, lowering your AGI could actually increase the amount of your premium tax credit that helps to pay for your insurance.
Saver’s Credit – For lower income taxpayers, there is a tax credit that helps you pay for your IRA contribution. The credit is a percentage of your IRA contribution ranging from 50% to 10% of your first $2,000 of IRA contributions. If you are married, it applies to each spouse individually. For 2022, the credit applies to married taxpayers with an AGI less than $68,000, single taxpayers under $34,000 and head of household filers under $51,000.
Choosing Between Traditional & Roth IRAs – Generally distributions (except for non-deductible contributions) from traditional IRAs are taxable, while distributions from Roth IRAs are tax-free. This is because you can’t deduct contributions to Roth IRAs.
For more details on how an IRA contribution will impact your 2022 tax return, please give this office a call. We can also determine the effect at your tax appointment.