One of the best things about paying your taxes, which is most likely the only pleasant thing, is that you are eligible for a refund if you overpay them. If you are making contributions anywhere near the average tax refund of $2,700 last year, here is an idea that can grant you greater tax refund for the years to come.
If at this moment you have not yet made a contribution to your IRA for 2009 tax year, think about taking your refund and housing it inside a deductible Traditional IRA. If you are eligible to make deductible Traditional IRA contributions you’ll definitely be awarded with larger refund. Although you’ll have to deal with less cash on your wallet, because you are making larger sum of contributions to your Traditional IRA, once you retire, you will have to pay fewer taxes. When contributing funds, it’s beneficial to fine-tune your tax return to show this contribution, permitting to obtain a bigger return.
Aside from reducing your tax liability, you also minimize your adjusted gross income (AGI) and possibly prompt the Saver’s Credit. This approach may let you lower the deductions that were already phased out for you, like the earned income tax credit. Note that contributed funds to an IRA that is tax deductible lower your AGI but do not have any impact to your MAGI or modified adjusted gross income – meaning your contributions are added back to determine your MAGI.
First, you must understand that not all people can deduct contributions to their Traditional IRA and the regulations for the amount that can be deducted are quite complex, but comprehensively outlined in Chapter 1 of Publication 590. It’s best to discuss matters with a tax professional for your particular case, but generally you are not qualified to deduct contributions if you already have an employer-sponsored retirement account and your MAGI is in excess of $66,000 if you are single, or $109,000 if you are married filing jointly.
The Traditional IRA and Roth IRA share the same limits on contribution, which amounts to $5,000 for year 2009 and 2010 ($6,000 for those who are 50+). If you make contributions amounting to $1,000 to your Roth, you will only be allowed to make another $4,000 to your Traditional IRA. Provided with this option, most investors and soon-to-be retirees believe that contributing to a Roth IRA is more advantageous than contributing to a Traditional IRA even if it is tax deductible, since the tax rates are anticipated to skyrocket in the near future.
Lastly, while you can file electronically and have the benefit of getting your refund within 10 days, you should find a way to invest the money even for a short-term. Depending on the amount of your refund and how huge your contributions are, this can be a challenging task. If you can’t or don’t want to have short-term investments, you can just file your return, obtain your refund, contribute funds prior to the 15th of April, and then file your amended 1040X return.
Despite some limitations, this is truly an excellent option for you to increase your tax refund by simply contributing to an IRA.