How to Reduce Your 2012 Tax Liability…in 2013!
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
There isn’t much you can do now, in 2013, to lower your tax liability for 2012. One possible way, however, can not only help you save money on your 2012 taxes, but can also help you plan for retirement. I’m talking, of course, about a deductible IRA contribution. 2012 IRA contributions can be made up until April 15, 2013 and, if you meet certain criteria, you can take a deduction for that contribution, thus reducing your 2012 tax liability.
If you haven’t made an IRA contribution for 2012 and are wondering if you can make a deductible IRA contribution now to help reduce your 2012 tax bill, follow the questions below to find your answer.
1) Did you have “compensation?” (Compensation only includes certain types of income, such as wages, self-employment income and taxable alimony. It does not include interest, dividends, capital gains or other passive income.)
If no, you CANNOT make a deductible IRA contribution for 2012. In fact, you can’t make any traditional IRA or Roth IRA contribution at all.
If yes, move on to the next question.
2) Were you born after June 30, 1942?
If no, you CANNOT make a deductible IRA contribution for 2012. You also cannot make a nondeductible contribution to a traditional IRA.
If yes, move on to the next question.
3) Were either you or your spouse an “active participant” in a company-sponsored retirement plan for 2012? (The definition of active participation varies depending on the type of plan. For 401(k) and similar plans, there is active participation if any salary deferrals or employer contributions were made during 2012.)
If no, here’s some good news for you. You CAN make a deductible IRA contribution for 2012. Note that if neither you nor your spouse were an active participant in a company plan, there is no income limit preventing you from taking a deduction for your IRA contribution.
If yes, see below.
If you had compensation in 2012 and were not age 70 ½ by the end of the year, you can definitely make an IRA contribution for 2012, but if either you or your spouse actively participated in a company plan, you MAY not be able to deduct all or a portion of your IRA contribution.
Unfortunately, here’s where it gets a little more complex. The final answer depends on three factors:
- Your 2012 modified adjusted gross income (MAGI)
- Your filing status for 2012
- Whether it was you and/or your spouse that was the active participant in 2012.
If you know your 2012 income and filing status, you can use the following two charts to see if you can deduct all or a portion of your 2012 IRA contribution.
If you were an active participant in a company plan in 2012, click here to see if you can deduct all, part or none of your 2012 IRA contribution.
If you were not an active participant in a company plan in 2012 but your spouse was, click here to see if you can deduct all, part or none of your 2012 IRA contribution.
So make those IRA contributions now and hopefully you can save a little in taxes at the same time. If you have any questions on your ability to make or deduct your contribution, check with your tax preparer or financial advisor.