There’s Still Time To Lower Your 2013 Tax Bill (Really!)

With Tax Day just five days away, you still have time to reduce your tax bill for 2013. Yes, your 2013 tax bill.

You have until April 15, 2014, to make contributions to your traditional individual retirement account (IRA)* and have it count for the 2013 tax year. If you do it right, and that includes making it on time, you can claim your contribution as a tax deduction even if you don’t itemize your deductions. It’s one of those quirky – but welcome – provisions in tax law.

If you (or your spouse, if married) aren’t covered by a retirement plan at work, you can sock away as much as $5,500 for the 2013 tax year and still qualify for the deduction; that amount is $6,500 if you’re age 50 or older. If your taxable compensation is less $5,500 (or $6,500 if you’re age 50 or older), the deductible amount would be limited to your taxable compensation. If you have more than one IRA, those limits apply to the total contributions to all of your traditional IRAs, not per IRA.

There is an exception to the taxable compensation rule: if you are married and you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. In that case, the total of your contributions can’t exceed the taxable compensation reported on your joint return.

But what about those work-related retirement plans? If neither spouse participated in a retirement plan at work during the year, you can put away as much as you want, up to those contribution limits. If you are married and you do not participate in a retirement plan at work but your spouse does, your deduction is phased out if your MAGI is more than $178,000 but less than $188,000. If, however, you participate in a retirement plan at work, your deduction is phased out if your modified adjusted gross income (MAGI) is:

• More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $59,000 but less than $69,000 for a single individual or head of household, or
• More than $0 but less than $10,000 for a married individual filing a separate return.

When you’re figuring your MAGI for purposes of contribution limits, you must include any distributions from a qualified retirement plan even though they are not included in income for purposes of the new net investment income tax.

When you’re figuring the actual contribution amount, you will include brokers’ commissions paid in connection with your traditional IRA. However, trustees’ administrative fees are not subject to the contribution limit.

Be aware of how life events can affect your deduction. If you were divorced or legally separated before December 31, 2013, you cannot deduct any contributions to your spouse’s IRA for 2013. Once you’re divorced or legally separated, you can only deduct contributions to your own IRA.

Watch birthdays, too: You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age. Remember, while they may have tax advantages, Roth IRA contributions are not deductible for federal income tax purposes.

And yes, it is possible to save too much. If you contribute more than the contribution limit OR ignore those age limits OR make an improper rollover contribution to an IRA, you may have an excess contribution. Those are subject to a penalty of 6% per year so long as you keep those excess contributions in your IRA. If you contribute too much, you’ll want to mitigate the consequences by taking out the excess contributions from your IRA before the due date of your individual income tax return (including extensions) as well as withdrawing any income earned on the excess contribution.

If you’re still on the fence, get moving: contributions can be made to your traditional IRA any time during the year or by the due date for filing your return for that year. It doesn’t, however, include extensions. And, if you really want to file early, you can: the IRS allows you to file your return claiming a traditional IRA contribution before the contribution is actually made. The rule is that the contribution must be made by the due date (that’s April 15, 2014, this year), and not the filing date.

If you’re not sure how much – and whether – you can contribute and deduct, check with your tax professional – but do it fast! Tax Day is almost here.

* @masonapostol called me out on twitter for referring to an IRA as an individual retirement account rather than an individual retirement arrangement. He’s right as the term used by IRS is, in fact, individual retirement arrangement since IRAs can refer to accounts or annuities. However, you won’t see “arrangement” in the Tax Code at Section 408 – just account and annuity – which is why most tax attorneys and financial advisors never use the term arrangement (tax professionals who rely on IRS Pubs may since Pub 590 is actually called “Individual Retirement Arrangements”). Roth IRAs are never called arrangements, just plans (which doesn’t even make sense, really). So, there’s the clarification for you, along with a little cocktail party fodder.