Making a last-minute contribution to an IRA may help you reduce your 2018 tax bill. If you qualify, your traditional IRA contribution may be tax deductible. And if you had low to moderate income and meet eligibility requirements, you may also be able to claim the Savers Credit for 2018 based on your contributions to a traditional or Roth IRA. Claiming this nonrefundable tax credit may help you reduce your tax bill and give you an incentive to save for retirement. For more information, visit irs.gov.
You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2018 ($6,500 if you were age 50 or older on December 31, 2018). For most taxpayers, the contribution deadline for 2018 is April 15, 2019 (April 17 for taxpayers who live in Maine or Massachusetts).
Even though tax filing season is well under way, there’s still time to make a regular IRA contribution for 2018. You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2018 ($6,500 if you were age 50 or older on December 31, 2018). For most taxpayers, the contribution deadline for 2018 is April 15, 2019 (April 17 for taxpayers who live in Maine or Massachusetts).
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2018, even if your spouse didn’t have any 2018 income.
You can contribute to a traditional IRA for 2018 if you had taxable compensation and you were not age 70½ by December 31, 2018. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2018, then your ability to deduct your contributions may be limited or eliminated, depending on your filing status and modified adjusted gross income (MAGI). (See table below.) Even if you can’t make a deductible contribution to a traditional IRA, you can always make a nondeductible (after-tax) contribution, regardless of your income level. However, if you’re eligible to contribute to a Roth IRA, in most cases you’ll be better off making nondeductible contributions to a Roth, rather than making them to a traditional IRA.
|2018 income phaseout ranges for determining deductibility of traditional IRA contributions:|
|1. Covered by an employer-sponsored plan and filing as:||Your IRA deduction is reduced if your MAGI is:||Your IRA deduction is eliminated if your MAGI is:|
|Single/Head of household||$63,000 to $73,000||$73,000 or more|
|Married filing jointly||$101,000 to $121,000||$121,000 or more|
|Married filing separately||$0 to $10,000||$10,000 or more|
|2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan||$189,000 to $199,000||$199,000 or more|
You can contribute to a Roth IRA even after reaching 70½ if your MAGI is within certain limits. For 2018, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $120,000 or less. Your maximum contribution is phased out if your income is between $120,000 and $135,000, and you can’t contribute at all if your income is $135,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $189,000 or less. Your contribution is phased out if your income is between $189,000 and $199,000, and you can’t contribute at all if your income is $199,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
|2018 income phaseout ranges for determining eligibility to contribute to a Roth IRA:|
|Your ability to contribute to a Roth IRA is reduced if your MAGI is:||Your ability to contribute to a Roth IRA is eliminated if your MAGI is:|
|Single/Head of household||$120,000 to $135,000||$135,000 or more|
|Married filing jointly||$189,000 to $199,000||$199,000 or more|
|Married filing separately||$0 to $10,000||$10,000 or more|
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)
Finally, if you make a contribution — no matter how small — to a Roth IRA for 2018 by your tax return due date and it is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2018.
With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help you potentially increase your gift.
Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, with a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].
However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.
Make sure you retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.
For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.
Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, phone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax Exempt Organization Search tool. And don’t send cash; contribute by check or credit card.
The IRS has released proposed regulations that would shut down some suggested workarounds for the new $10,000 limit on the deductibility of state and local taxes (SALT). The new guidance would close the door on a strategy offered by some states to circumvent the deduction limit by attempting to turn the taxes paid into charitable contributions not subject to the same cap.
Historically, if you itemized deductions on your federal income tax return, you could generally claim a deduction for taxes paid to state and local governments, including income and property taxes (or sales tax in lieu of income tax). For 2018 to 2025, the deduction for state and local taxes is limited to $10,000 ($5,000 for married taxpayers filing separate returns).
Some high-tax states have proposed potential workarounds to the new federal limit on the deduction for state and local taxes, including:
The proposed regulations address only the concept of trying to reposition payment of state taxes as charitable contributions.
The proposed IRS regulations would restrict the charitable deduction workaround by:
The proposed regulations have an effective date for amounts paid and property transferred after August 27, 2018.
An individual makes a payment of $1,000 to a charity. In exchange for the payment, the individual is entitled to a state tax credit of 70% of the payment. The federal charitable deduction is reduced by $700 ($1,000 x 70%) to $300.
An individual contributes a painting worth $100,000 to a charity. In exchange for the contribution, the individual is entitled to a state tax credit of 15% of the fair market value of the property. The federal charitable deduction is not reduced because the credit does not exceed 15%.
An individual makes a payment of $1,000 to a charity. In exchange for the payment, the individual is entitled to a state tax deduction equal to the amount of the payment. The federal charitable deduction is not reduced because the deduction does not exceed the amount of the payment.
Whether or not these limits based on state or local tax credits or deductions apply, the amount of your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity and the property contributed.