It appears that the IRS will not be extending the filing deadline this tax season, which means that you have until 4/15/21 to file your Federal taxes on time. Many individuals are wondering how they can save money on taxes. I recommend that you do tax planning in the fall, but there are still some things that you can do now to save money. Retirement savings is one such strategy.
There are many types of retirement plans that you can contribute to that will reduce your taxes including but not limited to IRA, SEP IRA and profit sharing on a 401(k) plan. You can compute your taxes both with the retirement contributions and without to determine the tax savings. The SEP IRA and the 401 (K) profit-sharing plan can only be offered by your business if you are a business owner. The Traditional IRA is available to taxpayers who have earned income or whose spouses have earned income. Here is a brief summary for each of the plans:
- Traditional IRA: New for 2020 – There is no longer an age restriction for contributing to a Traditional IRA whereas prior to tax year 2020, you had to be younger than 70 ½. To contribute to a Traditional IRA, you or your spouse must have earned income. The maximum contribution is $6,000; $7,000 if you are age 50 or over. To maximize your contribution amount, your Adjusted Gross Income (AGI) needs to be below $196,000 if you are filing MFJ, or QW, below $124,000 if you are filing Single or HOH, or $0 if filing MFS. If your income is above these thresholds, you may be able to contribute a reduced amount towards your Traditional IRA.
- SEP IRA: Contributions made by your business to the owners and eligible employees. The business needs to pay the owners and eligible employees proportionately based upon wages for eligible employees, owners’ wages for S Corporations or owners business profits for LLC’s and sole proprietors. These contributions will reduce 2020’s income, if they are made by the filing date of the return including extensions. This benefit can reduce each owner’s income by as much as $57,000.
- 401(k) plan with profit sharing: This plan must have already been set up through your business in 2020. The profit-sharing portion of the 401(k) is similar to the SEP plan above.