Once a new year rolls in, people all across America start thinking about tax season. It’s not too late to reduce your tax burden. Did you know that if you are still working, you can continue to make contributions to an Individual Retirement Account that can be deducted from your 2019 taxes all the way up to April 15? An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. An IRA is similar to a 401k, but the difference is a 401k plan must be established by an employer.
There are two kinds of IRAs: Traditional and Roth. With traditional IRAs, you can deduct contributions now and pay taxes on withdrawals later; with Roth IRAs, you can pay taxes on contributions now and get tax-free withdrawals later.
There are some restrictions to the deductions you can take. The IRS sets a contribution limit. For 2020, your total contributions to all of your traditional and Roth IRAs cannot be more than: $6,000 ($7,000 if you're age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit.
Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels. Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.
To learn more about the income levels and restrictions for those covered at work, the IRS has guidelines here. For more IRS guidelines about IRAs in general, visit this website
Even if you don’t plan to contribute to an IRA, each tax season is a good time to revisit your tax plan. Though you only file your taxes once a year, you should form a yearlong tax plan. Here are some tips:
Since federal taxes operate on a pay-as-you-go basis, most people need to pay most of their tax during the year as they earn income. It’s a good idea for everyone to do a Paycheck Checkup to make sure you’re not having too little withheld, which could lead to a smaller than expected refund or even a tax bill. You may also want to ensure you aren’t having too much tax withheld, if having that extra money in each paycheck is more helpful than getting a larger refund when you file.
Develop a record keeping system—electronic or paper—that keeps your important info together. Add tax records to the files as you receive them. This includes year-end Forms W-2 from employers, Forms 1099 from banks and other payers, other income documents and records of virtual currency transactions. Having records organized can help make preparing a tax return easier. It may also help you discover potentially overlooked deductions or credits.
Save for retirement. Retirement savings can also lower your Adjusted Gross Income (AGI). Contributing money to a retirement plan at work, like a 401(k) plan, can reduce your AGI. Investing in a traditional IRA plan is another way to save for retirement and lower taxable income. Self-employed SEP, SIMPLE, and qualified plans are also retirement options that can lower AGI.
Stay connected with the IRS. The IRS has several digital tools you can use to stay updated on important tax information that may help with tax planning. In addition to visiting the IRS.gov website, you can download the IRS2Go mobile app watch IRS YouTube videos, and follow the IRS on social media.
Regardless of your income level, age or working situation, having a yearlong strategy for your taxes may help you stay equipped and informed on all your tax matters.
Disclaimer: Investment and insurance products and services are offered through INFINEX INVESTMENTS, INC. Member FINRA and SIPC. Infinex and BancorpSouth Bank are not affiliated. Products and services made available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value.
*BancorpSouth Wealth Management Advisors do not provide tax advice. Individual investors should always contact his/her tax preparer for tax questions and/or advice.
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