Every January ushers in a new tax year, and it’s when we all begin the process of closing out last tax year.
As you start gathering the annual alphabet soup of tax reports (W2, 1099-R, 1099-INT, K-1, etc…), take note of what income sources you can control in whole or in part.
Even though 2021 is in the rearview mirror, there is at least one way you can still reduce your 2021 tax bill. How? Make a deductible IRA contribution for the previous tax year. You have until the tax filing deadline in April.
First you must determine if you are eligible. If you, or your spouse, were not covered by an employer retirement plan in 2021, you each could contribute $6,000 to an IRA account ($7,000 if you are over age 50). Doing so reduces your 2021 income dollar-for-dollar by the amount of your contribution.
If you or your spouse were covered by an employer plan last year, you may be able to deduct all, some, or none, of an IRA contribution. In this situation, deductibility depends on your income level, something the IRS calls the traditional IRA “phase-out”.
For tax-year 2021, the phase-out for single filers was between $66,000 to $76,000 AGI (adjusted gross income). For married joint filers, the phase-out was between $198,000 to $208,000 AGI.
Generally, if you (or your spouse if you are married) are covered by an employer retirement plan, and your AGI falls above the upper phase-out level for your filing situation, you cannot make a deductible IRA contribution. Its best to talk with your tax professional for details regarding IRA deductibility in your specific situation.
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