Benefits
IRA Contributions Give Taxpayers a Valuable Tax Benefit – But Watch the Calendar
As you’re working through federal income tax returns of clients during the home stretch, you hold a veritable ace up your sleeve: the IRA contribution. For clients who qualify, a contribution made by the tax return due date – April 15, 2015 for ...
Mar. 25, 2015
As you’re working through federal income tax returns of clients during the home stretch, you hold a veritable ace up your sleeve: the IRA contribution. For clients who qualify, a contribution made by the tax return due date – April 15, 2015 for the 2014 tax year – may still be deducted above the line on Form 1040. It’s one of the rare times when you can reduce your tax liability after the close of the year.
But the deadline for contributions that are deductible on a 2014 return remains April 15 – with no exceptions – even if the client requests a filing extension under Form 4868.
The maximum IRA contribution allowed for the 2014 tax year is the lesser of your earned income or $5,500; $6,500 if you’re age 50 or over. For starters, contributions are fully deductible, but a deduction may be reduced or eliminated if you’re an active participant in an employer-provided retirement plan AND your modified adjusted gross income (MAGI) exceeds an annual threshold.
The limit for IRA deductions of active plan participants depends on filing status. If you’re a single filer, the phase-out range for the 2014 tax year is between $60,000 and $70,000 of AGI and between $96,000 and $116,000 for joint filers. A partial deduction is allowed if you fall within either range. If you’re a joint filer and only spouse is an active plan participant, the phase-out range is kicked up to between $181,000 and $191,000 of MAGI.
Although filing a tax return extension gives you greater flexibility in some areas, this tax break doesn’t apply to deductions for IRA contributions. The final deadline is April 15, no ifs, ands or buts. So make sure that your clients who qualify for IRA deductions fulfill this obligation. As with tax return filings, a mailed contribution that is postmarked by April 15th is considered to have met the deadline, even if the financial institution receives it later.
What happens if a client contributes to an IRA after the April 15 deadline? It’s not the end of the world. In this case, the contribution will be treated as having been made for the 2015 tax year and might be deductible on next year’s return. At worst, it enables the client to accumulate more earnings than he or she would have received by waiting until next tax return season.