Contributed by Chris Strand, Accounting Program Chair, Minnesota School of Business – Richfield Campus
Accounting students and graduates stay on top of the changing tax rules. They study how to minimize your tax burden. Accounting instructor and Program Chair Chris Strand shares a tip that could impact your 2012 tax return.
Even though December 31 has come and gone, there are still things a taxpayer can do to lessen their 2012 tax liability. For instance, the tax code allows taxpayers to make payments to an IRA (Individual Retirement Account) any time up until the due date of their annual tax return. For most taxpayers, that is the dreaded April 15.
How does an Individual Retirement Account lessen one’s tax burden?
Lets say you pay a marginal rate of 25% on your income tax. By contributing $1,000 to an IRA account before filing your tax return, you will lessen your taxable income by $1,000 thereby lessening the tax you owe by $250. In other words, you can sock away $1,000 for retirement savings and it will only cost you $750.
Most taxpayers can deduct up to $5,000 of contribution in any one year. ($6,000 if you are age 50 or over). Be aware, however, the amount that is deductible can be reduced if the taxpayer or their spouse participates in an employer based retirement savings plan, such as a 401K.
Whats the Catch?
In exchange for all these tax benefits, please note that there are substantial penalties if you withdraw the money prior to retirement. There are, however, instances of “hardship” that can be claimed to avoid those penalties in some cases. Having said that, you should not plan on seeing any of your money contributed until you retire.
How Can I Set Up an IRA?
Setting up an Individual Retirement Account is quite simple. Just go to a bank and tell them you want to set one up. They will gladly walk you through the process and set up your account.
Learn more about tax accounting at Minnesota School of Business!!