How to Decrease Tax Liability With a Last Minute IRA Contribution
Just because the calendar year has ended doesn't mean you've missed out on your chance to lower your tax liability with a contribution to your traditional individual retirement account. Unlike most tax deductions, the deadline for contributing to a traditional IRA is your tax filing deadline, not Dec. 31. For example, you could make your 2013 traditional IRA contribution as late as April 15, 2014. However, you must be eligible to make a deductible contribution, and you can't exceed the annual contribution limit. You can't deduct your contribution to a traditional IRA for you or your spouse if your modified adjusted gross income is higher than the annual limits.
Compare your modified adjusted gross income to the income limits for your filing status if either you or your spouse participates in a retirement plan through your job, to make sure you can deduct your contribution. If your income is too high, you can't use a traditional IRA contribution to lower your tax liability. You can find these limits in Internal Revenue Service Publication 590.Step 2
Contribute to your traditional IRA before your tax filing deadline. Your total contributions for the year can't exceed the annual limits. As of 2012, you can contribute up to $5,000 if you're younger than 50, and $6,000 if you're 50 or older. If you're married, the limit applies separately to each spouse.Step 3
Report the amount of your deductible traditional IRA contribution on your tax return, using either Form 1040 or Form 1040A. Form 1040EZ doesn't have a line to deduct traditional IRA contributions. On Form 1040, the deduction goes on line 32. On Form 1040A, it goes on line 17.
- If you make your contribution during the following calendar year, tell your financial institution you want it to count for the prior year. If you don't, it will assume it's for the current year. For example, if you make your 2013 contribution in January 2014, tell your financial institution it's for 2013, or the institution will treat it as your 2014 contribution.
- Your IRA contribution deadline does not get extended if you file for a tax filing extension.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."