Taxpayers, no matter their age, may be able to claim a deduction on their 2020 tax returns for contributions to their Individual Retirement Arrangement (IRA) if they make them by April 15.
Contributions to a traditional IRA are usually tax-deductible, and distributions are generally taxable. Taxpayers have from now to April 15, 2021, to make contributions that count for a 2020 tax return.
Taxpayers can file their return claiming a traditional IRA contribution before the contribution is actually made. The contribution must then be made by the April due date on the return.
While contributions to a Roth IRA are not tax-deductible, qualified distributions are tax-free. In addition, low- and moderate-income taxpayers making these contributions may also qualify for the Saver’s Credit.
Saving for the future
An IRA is designed to enable employees and the self-employed to save for retirement. Most taxpayers who work are eligible to start a traditional or Roth IRA or to add money to an existing account.
Generally, eligible taxpayers can contribute up to $6,000 to an IRA for 2020. If a taxpayer was age 50 or older at the end of 2020, they can contribute up to $7,000.
Restrictions on taxpayers age 70 1/2 or older to make contributions to their IRA were removed in 2020.
For 2020, if a taxpayer is covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is reduced, depending on the taxpayer’s modified adjusted gross income.
The Internal Revenue Service further spells out the limitations on the deduction this way:
- Single or head-of-household filers with income of $65,000 or less can take a full deduction up to the amount of their contribution limit. For incomes more than $65,000 but less than $75,000, there is a partial deduction and if income is $75,000 or more there is no deduction.
- Filers that are married filing jointly or a qualifying widow(er) with $104,000 or less of income, a full deduction up to the amount of the contribution limit is permitted. Filers with more than $104,000 but less than $124,000 can claim a partial deduction and if their income is at least $124,000, no deduction is available.
- For joint filers, where the spouse making the IRA contribution is not covered by a workplace plan, but their spouse is covered, a full deduction is available if their modified AGI is $196,000 or less. There’s a partial deduction if their income is between $196,000 and $206,000 and no deduction if their income is $206,000 or more.
- Filers who are married filing separately and have an income of less than $10,000 can claim a partial deduction. If their income is at least $10,000, there is no deduction.
The IRS provides worksheets in the Form 1040 Instructions and in Publication 590-A, Contributions to Individual Retirement Arrangements. The deduction is claimed on Form 1040, Schedule 1.
Nondeductible contributions to a traditional IRA are reported on Form 8606, Nondeductible IRAs.
Claiming the Saver’s Credit
The Saver’s Credit is also known as the Retirement Savings Contribution Credit. It’s often available to IRA contributors with adjusted gross income that’s below certain levels.
Beginning in 2018, designated beneficiaries may be eligible for a credit for contributions to their Achieving a Better Life Experience (ABLE) account.
More information on ABLE account contributions is available in Publication 907, Tax Highlights for Persons with Disabilities. To claim the Saver’s Credit, use Form 8880, Credit for Qualified Retirement Savings Contributions. Form instructions have details on correctly figuring the credit.
Source:Tax Time Guide: Get credit for IRA contributions made by April 15 on 2020 tax returns