If you want to increase your tax refund by thousands of
dollars, the easiest way to do so is to open and fund an IRA
account before April 15. The math on this is simple.
Let's say you're married filing jointly and that your combined
taxable income for 2013 was $90,000. If neither you nor your
spouse contributed to a workplace retirement plan, you're each
entitled to deduct $5,500 from your gross income to contribute to
a traditional IRA account. That adds up to $11,000 and thereby
reduces your taxable income to $79,000.
Here's where the magic comes in. Without this deduction, you
would owe $14,358 in taxes for the 2013 calendar year. This would
equate to 16% of your taxable income. By contrast, with the
deduction, your tax liability would drop to $11,608, or 12.9%, of
your taxable income.
In other words, under this scenario, all you have to do to
save yourself $2,750 (and thereby increase your tax refund by a
commiserate amount if you're subject to withholdings) is to
transfer $11,000 from one account under your control -- say, for
example, your savings account -- to another -- your IRA
Now, just to be clear, there are a handful of rules that
govern how the IRA deduction works.
In the first case, it's important to keep in mind that there
are two types of IRAs -- traditional and Roth. A traditional IRA,
which is what I've discussed, allows qualified taxpayers to take
an immediate deduction. A oth IRA, on the other hand, doesn't
provide for a deduction this year, but it allows the assets
therein to grow tax-free --
click here to learn more about Roth IRAs.
A second thing to be aware of is that
there's a limit to how much you can contribute to
an IRA account
there's a limit to how much you can contribute to an IRA account
and thereby deduct on your tax return. The maximum limit for 2013
is $5,500 per taxpayer. But this is assuming that neither you nor
your spouse contributed to a tax-advantaged retirement account at
work -- most commonly, a 401(k).
Additionally, the deduction phases out at higher income
levels. If you're married filing jointly, the two thresholds are
modified adjusted gross incomes of $95,000 and $115,000. If your
modified AGI is below the former, you can take the full
deduction. If it exceeds the latter, you can't take any. In
between the two, you're entitled to a partial deduction -- see
the IRS's official explanation here.
Exceptions aside, it's irrational not to take advantage of an
IRA account if you have the ability to do so. It's effectively
free money that's just waiting for you to claim it. As a result,
if you haven't already pulled the trigger on this, you still have
until April 15 to make the decision.
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