There is still time to do something in 2022 that will cut your 2021 tax bill. That something is to make certain contributions to retirement accounts.
You may be able to claim a deduction on your 2021 tax return for contributions to your IRA made through April 18, 2022.
An IRA or Individual Retirement Account is simply a personal savings plan that lets employees and the self-employed set money aside for retirement and it can have tax advantages.
Remember this: to qualify for 2021 tax benefits the contributions must be designated for 2021 to the financial institution.
Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For those 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs may be deductible up to the contribution limit or 100% of the taxpayer’s compensation, whichever is less. There is no longer a maximum age for making IRA contributions.
Those who make contributions to certain employer retirement plans, such as a 401k or 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account, may be able to claim the Saver’s Credit. Also known as the Retirement Savings Contributions Credit, the amount of the credit is generally based on the amount of contributions, the adjusted gross income, and the taxpayer’s filing status. The lower the taxpayer’s income (or joint income, if applicable), the higher the amount of the tax credit. Dependents and full-time students are not eligible for the credit. Remember to consult with a tax professional if you have any questions.
What about a Roth IRA? While contributions to a Roth IRA are not tax-deductible, qualified distributions are tax-free. Roth IRA contributions may be limited based on filing status and income. Contributions can also be made to a traditional and/or Roth IRA even if participating in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA-based plan).
The important thing to remember is that these tax breaks can apply to 2021 taxes even though you are taking action in 2022.
Disclaimer: Alan Mendelson is a well-known TV consumer news reporter who reports on tax issues. You should seek professional advice if you have tax questions or issues.