It's not too late to qualify for a tax deduction that could save you more than $1,000 on your 2012 tax bill. All you need to do is contribute to an IRA and then watch your tax bill decrease.
You have until April 15, 2013, to make an IRA contribution that will reduce the taxes you owe for tax year 2012. "It's one of the last ways to lower your tax bill," says Charlie Capasso, a certified financial planner for Detterbeck Wealth Management in Charleston, S.C. "We'll see what the tax liability is projected to be, and then plug in an IRA and see how that changes it." Workers can contribute up to $5,000 to an IRA in 2012, or $6,000 if they are age 50 or older. (Those limits will increase to $5,500 and $6,500, respectively, for tax year 2013.)
The tax savings from making an IRA contribution in April can be enormous. If an employee who is in the 25 percent tax bracket contributes $5,000 to a traditional IRA, he will save $1,250 on his current tax bill. He is able to defer paying income on that $5,000 until the money is withdrawn. "If you paid those taxes today, that $1,250 is gone. You'd be much better off to have that $1,250 spending the next 30 to 50 years growing," says Donald Whalen, a certified financial planner for Versailles Financial in Alpharetta, Ga. "The longer you can defer taxes, the better, especially when you can let it grow and take it out at a much bigger number." And if you drop into the 15 percent tax bracket in retirement, you will only pay $750 in taxes on that $5,000 later when you withdraw it.
If you make an IRA contribution in April, make sure to specify which tax year you want the deposit to be applied to. If you don't specify, the financial institution may automatically apply the contribution to the calendar year in which it was received. "On your check in the memo, just make sure you write in '2012.' And in a week or two when the money gets into the account, make sure to follow up with them to make sure they credited it for 2012," says Andrew Paladino, a certified public accountant and founder of Paladino Financial Group in Timonium, Md. "There are some brokerages that will say they need the money in house by April 12. Be careful if there are some deadlines imposed, not by the IRS, but by where you are putting the money."
In addition to this valuable tax deduction, low-income workers can also claim the saver's credit for the very same contribution. Workers who earned less than $28,750 (singles), $43,125 (heads of household), and $57,500 (couples) in 2012 may be eligible for this tax credit worth up to $1,000 for individuals and $2,000 for couples. The credit is calculated based on the first $2,000 you contribute to an IRA, and ranges from 10 percent to 50 percent of the amount you contribute, based on your income.
However, the ability to save in an IRA is limited for high earners who also have access to a retirement plan at work. For employees with a 401(k) or similar type of workplace retirement account, the tax deduction for IRA contributions is phased out for singles and heads of household who have modified adjusted gross incomes (AGI) between $58,000 and $68,000 in 2012 ($92,000 to $112,000 for couples). For IRA investors without a retirement plan at work who are married to someone with a 401(k), the IRA tax deduction is phased out if the couple's income is between $173,000 and $183,000 in 2012.
It's common to wait until the last minute to make IRA contributions. Approximately 45 percent of all Fidelity annual IRA contributions are made in the 28 days leading up to the tax deadline. And a quarter of new Fidelity IRAs are opened during the month of April. Vanguard saw a 38 percent spike in new IRA accounts in April 2012 compared to March.
You can file your tax return claiming a traditional IRA contribution before the money is actually in the account as long as you manage to make the deposit by the due date of your return. But people age 70½ and older are not eligible to get a tax deduction for a traditional IRA contribution. If you were born on or before June 30, 1942, you cannot defer taxes on an IRA contribution in 2012 or any future year.