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  • Writer's pictureStephen H Akin

Reduce Your 2017 Tax Bill With an IRA Contribution

There's still time to reduce your 2017 tax bill. You can make a tax-deferred individual retirement account contribution that can be applied to your 2017 tax return any time before April 17, 2018. Here's how to take advantage of this tax break for IRA participants.

Max out your IRA. You can defer paying income tax on up to $5,500 that you contribute to an IRA. A worker in the 25 percent tax bracket who maxes out his IRA could reduce his tax bill by $1,375. But you don't need to max out to get a tax break. A $500 contribution would reduce your tax bill by $125 if you are in the 25 percent tax bracket. Workers age 50 and older can make catch-up contributions worth up to an additional $1,000 for a maximum possible contribution of $6,500.

You can plug in an IRA contribution as you are preparing your tax return to see exactly how much your tax bill will decline if you move some money into an IRA. "You can run the numbers there in real time as you are getting your taxes done and see what a difference it will make," says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. "That may be enough to convince you to go ahead and make that contribution."

Watch out for eligibility restrictions. You can't make contributions to a traditional IRA after age 70 1/2. You also need earned income to be eligible to contribute to an IRA. "It can't be more than your earnings, so if you are 60 years old and you just have a part-time job and you made $4,000 for the year, that would be your limit," says Barbara Weltman, author of "J.K. Lasser's 1001 Deductions and Tax Breaks 2018: Your Complete Guide to Everything Deductible".

Contribute in each spouse's name. While couples can't open a joint IRA, you can open an IRA for each spouse and claim double the tax deduction. Couples can defer paying income tax on up to $11,000 if they max out two traditional IRAs, and that jumps to $13,000 if both members of the couple are age 50 or older. You can save in an IRA in each spouse's name even if one member of the couple did not work. "As long as one spouse has earned income that is at least as great as the IRA contribution, they can make a contribution for the nonearning spouse," Flores says.

Limits for 401(k) participants. Those who aren't provided with retirement benefits at work can contribute to an IRA regardless of how much they earn. However, if you are eligible for a traditional pension plan or workplace retirement account such as a 401(k), you can additionally make a tax-deductible contribution to an IRA only if your income falls below certain cutoffs. "If you are covered under another plan, there are some income limitations, and sometimes the deduction gets totally eliminated," says Michael Eisenberg, a certified public accountant and member of the AICPA's National CPA Financial Literacy Commission.

Those who earn up to $62,000 ($99,000 for couples) can defer paying income tax on up to $5,500 ($6,500 if age 50 or older) that they contribute to an IRA in 2017. The tax deductible amount is phased out for 401(k) participants earning $62,000 to $72,000 ($99,000 to $119,000 for couples) in 2017. When only one member of a married couple is eligible for retirement benefits at work, the IRA tax deduction phases out if the couple's income is between $186,000 and $196,000.

Claim the saver's credit. In addition to the tax deduction for a traditional IRA contribution, low income retirement savers can claim the saver's credit. "It's one of the rare opportunities people have to double dip and get a deduction and a credit," Flores says. Those with an adjusted gross income of up to $31,000 as an individual, $46,500 as a head of household or $62,000 as a married couple in 2017 who save in a retirement account and aren't a full-time student or claimed as a dependent on someone else's tax return are eligible for the saver's credit. The credit is worth 10, 20 or 50 percent of your retirement account contributions up to $2,000 for individuals and $4,000 for couples, with lower income people getting bigger credits.

Remember to specify the contribution year. IRA contributions received in 2018 will automatically be applied to this calendar year unless you specify that you are making a tax-year 2017 contribution. "You have to specify that it is a prior year contribution," Weltman says. "If you want to apply it as your 2017 contribution, you have to tell the custodian or trustee, otherwise it is going to be applied as the 2018 contribution."

Save your tax refund. If you will be getting a tax refund for 2017, consider putting part of it in an IRA to get a jump-start on your 2018 retirement savings. "You can apply your refund toward your 2018 contribution," Weltman says. "You just have to fill out a special form giving the IRS your account number so they know where to direct the funds."

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