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William Byrnes (Texas A&M) tax & compliance articles

7 Tax Facts for Making IRA Contributions

Posted by William Byrnes on May 14, 2014

In Tax Tip 2014-50, the IRS discussed 7 important tax facts about planning for contributions to an IRA.

1. A taxpayer must be under age 70 1/2 at the end of the tax year in order to contribute to a traditional IRA. There is no age limit to contribute to a Roth IRA.

2. A taxpayer must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income.  It also includes tips, commissions, bonuses and alimony. If a taxpayer is married and files a joint return, generally only one spouse needs to have compensation.

3. A taxpayer can contribute to an IRA at any time during the year for that year and even may count contributions, up to a certain date, made the following year.  That certain date for 2013 contributions to count, even if made in 2014, is that the contributions made in 2014 had to be by the due date of the 2013 tax return (which was April 15).

Thus, contributions may count for the year 2014 that are made in 2014 and that are made in 2015 up until the date that the 2014 tax return must be filed (Wednesday, April 15, 2015.)

The date to include IRA contributions may not be pushed back with extensions.   Also, no double counting!   If a taxpayer contributes to an IRA between Jan. 1 and April 15, then the IRA plan sponsor must apply it to the correct year which is either the current one, or the previous one, depending upon what the taxpayer has planned.  In general, taxpayers will use this option to contribute toward last year’s contribution limit when at the end of the year, they discover that they have not contributed the full amount allowed by the IRA tax rules.  Said another way, the taxpayer has excess contribution limit remaining for the previous year, and this option allows the taxpayer to fill it.

4. In general, the most a taxpayer can contribute to an IRA for 2014 is the smaller of either your taxable compensation for the year or $5,500. If a taxpayer were age 50 or older at the end of 2014, the maximum you can contribute increases to $6,500.

5. A taxpayer normally will not pay income tax on funds in a traditional IRA until the taxpayer starts taking distributions from it. Qualified distributions from a Roth IRA are tax-free.

6. A taxpayer may be able to deduct some or all of the contributions to a traditional IRA.  A taxpayer should use the worksheets in the Form 1040A or Form 1040 instructions to figure the amount of the contribution that can be deducted for a traditional IRA.  Unlike a traditional IRA, a taxpayer cannot deduct contributions to a Roth IRA.

7. A taxpayer can contribute to an IRA and also may also qualify for the Saver’s Credit. The credit can reduce taxes up to $2,000 if filing a joint return. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit.

2013_tf_insurance_emp_benefits_combo_covers-m_2Authoritative and easy-to-use, 2014 Tax Facts on Insurance & Employee Benefits shows you how the tax law and regulations are relevant to your insurance, employee benefits, and financial planning practices.  Often complex tax law and regulations are explained in clear, understandable language.  Pertinent planning points are provided throughout.

Organized in a convenient Q&A format to speed you to the information you need, 2014 Tax Facts on Insurance & Employee Benefits delivers the latest guidance on:

  • Estate & Gift Tax Planning
  • Roth IRAs
  • HSAs
  • Capital Gains, Qualifying Dividends
  • Non-qualified Deferred Compensation Under IRC Section 409A
  • And much more!

Key updates for 2014:

  • Important federal income and estate tax developments impacting insurance and employee benefits including changes from the American Taxpayer Relief Act of 2012
  • Concise updated explanation and highlights of the Patient Protection and Affordable Care Act (PPACA)
  • Expanded coverage of Annuities
  • New section on Structured Settlements
  • New section on International Tax
  • More than thirty new Planning Points, written by practitioners for practitioners, in the following areas:
    • Life Insurance
    • Health Insurance
    • Estate and Gift Tax
    • Deferred Compensation
    • Individual Retirement Plans

For an indepth analysis of deductions for donations to U.S. charities (and the government’s policy encouraging or discouraging these donations), download my article at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour” 

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