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 2021, the maximum amount of contribution to a 401(K) or similar workplace retirement plan is $19,500.
Retirement plans available for small business: SEP, SIMPLE, and Qualified Plans.
- For 2021, the maximum compensation used for determining contributions and benefits is $290,000. This limit increases to $305,000 for 2022.
- The limit on elective deferrals, other than catch-up contributions, is $19,500 for 2021 and $20,500 for 2022. These limits apply for participants in SARSEPs, 401(k) plans (excluding SIMPLE plans), section 403(b) plans, and section 457(b) plans.
- The limit on contributions, other than catch-up contributions, for a participant in a defined contribution plan is $58,000 for 2021 and increases to $61,000 for 2022.
- The limit on annual benefits for a participant in a defined benefit plan is $230,000 for 2021 and increases to $245,000 for 2022.
- The limit on salary reduction contributions, other than catch-up contributions, is $13,500 for 2021 and increases to $14,000 in 2022.
A plan can permit participants who are age 50 or over at the end of the calendar year to make catch-up contributions in addition to elective deferrals and SIMPLE plan salary reduction contributions.
- The catch-up contribution limitation for defined contribution plans other than SIMPLE plans is $6,500 for 2021 and 2022.
- The catch-up contribution limitation for SIMPLE plans is $3,000 for 2021 and 2022.
A participant’s catch-up contributions for a year cannot exceed the lesser of the following amounts.
- The catch-up contribution limit.
- The excess of the participant’s compensation over the elective deferrals that are not catch-up contributions.
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 2021.
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 2021 cannot exceed the lower of 25% of the employee’s compensation or $58,000.
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.
- Publication 560.
- Publication 590-A
- Publication 590-B
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