Is an IRA the Cure for Your Tax Bill?
The April tax deadline is quickly approaching and you realize you owe the IRS money. You keep reading articles saying that instead of paying dear old Uncle Sam your money, throw it into an IRA by the April deadline and you’ll be paying yourself rather than paying the IRS. It sounds perfect, doesn’t it?
I recently started researching this to see what the caveats of this strategy are. If you’re trying to lower your tax bill, here are some things you need to know:
What does “significantly more limited” mean, exactly?
You cannot deduct your IRA contributions if you are covered by a qualifying retirement plan at your company and your Adjusted Gross Income is:
If your Adjusted Gross Income is within $10,000 but not more than the above-mentioned cap, your deduction is only 40% of the difference between the cap and your AGI or 45% if you are over age 50. The IRS is kind enough to give you a floor of $200, meaning that if, for example, you make $300 less than their cap and are less than age 50, instead of you only being able to deduct $300 x .40 (or $120), you’re allowed a $200 deduction.
Reading all of this probably sounds confusing. It is. Actually, the only way I was able to figure this much out was by going through the IRA Deduction Worksheet in the IRS 1040 instruction booklet. I’d strongly encourage you to do the same if you are considering an IRA contribution to offset your taxes owed. If all of the numbers work out, contributing to an IRA is a great alternative to paying the IRS. What they say is true: why pay the IRS when you can pay yourself?
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