The tax filing deadline has arrived, May 17, 2021.
Taxpayers are advised to request an extension to October 15, 2021 if they cannot file on time. Compound interest on tax due starts on May 18, 2021.
There is still time to legally lower your tax liability. Many individuals and businesses have used them over years to minimize their taxable income and thus lower their tax due. Besides the most commonly used tax deduction or reduction items, many taxpayers do not use a qualified retirement plan to decrease their tax due.
- You could contribute to a qualified retirement plan up to the tax filing due date to reduce your tax liability by deferring income. A contribution to a qualified plan could drastically lower your tax liability depending on your specific tax and financial situation.
The amount of contribution to an IRA is $6,000 ($7,000 for age 50 or older). The tax deduction is limited by your Modified Adjusted Gross Income (MAGI) and your filing status. Married filing jointly taxpayers and married filing separately taxpayers have different limitations. Further, the deduction may be limited if you or your spouse is covered by a retirement plan at work.
For tax year 2020, the maximum amount of contribution to a 401(K) or similar workplace retirement plan is $19,500. The catch-up contribution limit for taxpayers 50 or older is $6,500.
- An employer or a self-employed could contribute to a Keogh plan, a profit sharing plan, a money purchase plan, and others if the plan is established by the last day of tax year 2020.
A SEP-IRA allows self employed taxpayers to establish and contribute to the plan on their own behalf and their eligible employees. The plan can be established as late as the due date of the tax return for the year, including extension. Contributions for tax year 2020 cannot exceed the lower of 25% of the employee’s compensation or $57,000.
Individuals and business owners are advised to have open discussion relating to their financial situation and transactions with their tax professional during the year. Not much could be done at the time of preparation of the personal or business tax return. The tax preparation stage is mainly the application of the tax laws and regulations.
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