Can You Dodge the Tax Axe?
I may be creeping into CPA-land here, but we are getting a lot of questions from our clients about what they can (or can’t) do to reduce their tax bill. All of us are still digesting the new Tax Cuts and Jobs Act, and for some it has caused an unexpected bill or a lower return. If you haven’t already filed for 2018, and/or you are planning to file an extension, there are a couple of options that allow you to “go back in time” and potentially get a tax deduction.
In both of the examples below, the funding deadlines are April 15th or your extension deadline if you have chosen to file for an extension (October 15, 2019).
- Contribute to a Traditional IRA for 2018 – For 2018, you are allowed to contribute up to $5,500 (or $6,500 if over age 50). Whether or not that contribution is deductible depends on one main factor: Are you or your spouse covered by a retirement plan at work?
- If not, then your contribution is likely deductible and could reduce your taxable income. Note that both you and your spouse can contribute if neither of you are covered by a plan.
- If you are single, and you are covered by a retirement plan, then you can likely make a deductible contribution if your income (technically, Modified Adjusted Gross Income or MAGI) is less than $73,000 (“phase outs” or lower deduction amounts start at $63,000)
- If you are married filing jointly, and the spouse making the contribution is covered by a work plan, the spouse can take a deduction if combined income is less than $121,000 (“phase outs” or lower deduction amounts start at $101,000)
- If you are married filing jointly, and the contributor (spouse) does not have a work plan, they can take a deduction if combined income is less than $199,000 (again, “phase outs” or lower deduction amounts start at $189,000)
- If you are married and filing separately, for all intents and purposes, you can’t make a deductible IRA contribution regardless of work plan coverage. The income limit is only $10,000.
- Contribute to a SEP IRA for 2018 – this is a popular option for solo or family business owners and other contractors. Think consultants and real estate agents. SEP IRAs were created for just these types of folks, and they essentially allow the employer to contribute money to the employee’s IRA (for what it’s worth SEP stands for Simplified Employee Pension). Often, the employer and employee are one and the same.
- Contribution limits are significantly higher. You can contribute up to 25% of your net earnings from self-employment income or $55,000 whichever is less.
- Keep in mind that if you do have eligible employees, you have to contribute the same percentage of salary for them as you do for yourself
As with anything tax-related, it’s best to speak with your tax professional about your specific situation, as there are many factors to consider.
On a somewhat unrelated note, the tax filing deadline also coincides with the start of the NHL Playoffs (that’s hockey for those of you wondering)! The Washington Capitals are looking to make another run at the Stanley Cup. And, as my father did for me, I am teaching my children how to properly yell at the TV! Recently, I and my two older kids attended a live game. It was a lot more fun than looking for tax deductions!