Professional View: Get the most out of your tax returnBy: Rashida Lilani, CFP, special to the Granite Bay View
Rashida Lilani is the owner and principal of Lilani Wealth Management in Roseville.
Professional View is written by local professionals who share their expertise with our readers. If you’d like to submit a column, email email@example.com. The Granite Bay View is not obligated to publish any material submitted.
Can I deduct the dog?
If you haven’t done so already, you may be getting ready to file your individual federal and state income tax returns. Or maybe you’re still thinking about it. Or maybe you’re not.
Either way, April 15 will soon be upon us, and perhaps you’re looking for ways to reduce Uncle Sam’s bill. The good news is that with over a month left for the filing deadline, there’s still time to consider taking advantage of certain tax deductions that may be available to you. While tax credits are highly desired and sought out as they are a dollar-for-dollar reduction of taxes due, tax deductions are not far behind, as they may reduce your taxable income, hence lowering the taxes due.
Although I haven’t been asked about deducting the dog on a tax return, at least not literally, it’s come close. But let’s talk about a deduction that may be available to you. The ever-so-popular Individual Retirement Account, or more commonly known IRA, is a great way to reduce your taxable income and save for retirement. For those who are eligible, the IRA contribution limit for 2012 is $5,000 and for individuals 50 or over, the catch-up contribution is an additional $1,000. For example, a 55-year-old can contribute up to $6,000 in an IRA. Contributions can be made all the way to the tax filing deadline of April 15, 2013.
Qualifying for a tax-deductible contribution to an IRA depends on at least a couple of different criteria: your participation in an employer-sponsored retirement plan and your Modified Adjusted Gross Income (MAGI). If you were an active participant in your employer’s qualified retirement plan in 2012, your eligibility to make a tax-deductible contribution to an IRA is limited if your MAGI was over $58,000 (filing single) or $92,000 (filing jointly). This eligibility is phased out completely if the MAGI was over $68,000 (filing single) or $112,000 (filing jointly).
However, if you have a non-working spouse, or your spouse was not offered a qualified retirement plan at work, he/she may be able to make a tax-deductible contribution to an IRA. Income limits still apply for eligibility but are higher than for an individual covered by an employer-sponsored plan. Contributions can be fully deductible for MAGI of up to $173,000. Phase-out begins at $173,000 and eligibility is completely phased out at $183,000.
Let’s consider the example of Ted, 49, and Lisa, 50. They file their taxes jointly and their MAGI for 2012 is $154,000. Ted is offered an employer-sponsored plan from work to which he actively contributes. Lisa is a stay-at-home mom and would like to save toward her retirement. She can contribute up to $6,000 to her IRA based on Ted’s income. Ted, however, cannot contribute due to his income and participation in his employer’s plan.
Remember, these contributions have to be made from earned income and the above criteria pertain to the tax-deductibility of your contributions. You can still make non-deductible IRA contributions at any income level; you just don’t get to deduct them on your tax return. Perhaps that’s a topic for another discussion. As would be the topic of Roth IRAs, which in my opinion are one of the most under-utilized retirement savings vehicles. Speaking of Roth IRAs, it’s important to note here that the $5,000 limit is an aggregate of contributions made for the tax year in a Traditional IRA and a Roth IRA. In addition, you can no longer contribute to an IRA starting the year you turn 70½ years of age.
Self-employed individuals have a few more options available to them. For simplicity, we’ll address two of them here: SEP-IRA and Solo 401(k). A SEP-IRA will allow a sole-proprietor to defer up to 20 percent of net self-employment income (up to $50,000 for 2012), while a Solo 401(k) will allow you to contribute the lesser of $17,000 or your net self-employment income. In addition, a $5,500 catch-up contribution is allowed in Solo 401(k) for individuals aged 50 or over, as well as a profit sharing contribution of up to 20% of net self-employment income. The SEP-IRA has no such provisions. Additional restrictions and limitations apply to each kind of plan and it is highly recommended that you consult with a tax adviser who can further determine eligibility and specific benefits of these retirement plans in your particular situation.
And finally, it’s not too early to contribute for 2013. This year, contribution limits have been raised to $5,500 with the catch-up contributions staying at $1,000.
Oh, and it's not likely that you can deduct your dog ... at least not anytime soon.