 Income tax 2021-2022, IRA deduction. Get ready to get refunds to the backs, dive in into income tax 2021-2022. Most of this information can be found at the Form 1040 Instructions Tax Year 2021, found on the IRS website, irs.gov, irs.gov. Here's the income tax formula focused on the adjustments to income. You might hear called the above the line deductions, the Schedule 1 deductions, deductions for adjusted gross income, keeping the adjustments to income, or those above the line deductions distinct in your mind from other deductions, such as the standard deduction or itemized deduction. Here's page one of the Form 1040 focused on line number 10, adjustments to income from Schedule 1. Here is the Schedule 1, part number 2. We're down here, line number 20, the IRA deduction. The total of this form, of course, going back to the Form 1040, page one, number 10, on the adjustments to income, there's our 6,000 here. So let's just give a quick recap on the IRA deductions. Remember, your general concept is you wanna have an idea of the IRA deduction of many of these kind of deductions so you can kind of explain the general rule and then know when you want to go to the tax software to get more detail on this deduction. Now the first thing you want to realize is that this IRA deduction is often one of the last kind of things you can do with the tax planning. Remember that we're doing the tax return preparation sometime after the tax year. So for tax year 2021, we're preparing the taxes sometime in 2022, in this case by April 18th, generally, unless there's an extension where we might be doing it at a later point in time. But if we're doing it by the due date of April 18th, then we often have the capacity to look into this IRA deduction in more detail, something we don't often have the capacity to do with other types of deductions because we're on a cash basis system. In other words, usually in order to get the deduction, you have to have taken the action in the tax year of 2021, actually made a cash payment oftentimes in some way in order to get the deduction. And so therefore at the point of time, you do the tax return, it's too late to do the tax planning because the tax year has already passed. But the IRA deduction, oftentimes you can look at the tax return and do the calculation and then still determine whether or not you could get some benefit from the IRA deduction and possibly have up until the point in time that the tax return is due, in this case, April 18th. So this is often like tax software will help you out with this oftentimes, giving you diagnostics or analysis as they might be called in different tax softwares, telling you how much they can possibly put into an IRA deduction and give you that last bit of planning. Now, you're often gonna get questions with the IRA deduction as well. The general way you want to think about it is that if you can get access to some other format of retirement plan, other than the IRA, the individual retirement account or individual retirement arrangement, then you typically want to do that if for nothing else because you can usually put more money into it. So in other words, if you're an employee, then you might have access to a 401K plan or a 403B plan if you're a government type of employee. And those are usually better to put money in than the IRA and they will limit the amount of money that you can typically put into an IRA. However, you're more restricted in the fact that you have to put the money in typically during the year into those other retirement accounts. So you don't have that last minute tax planning kind of thing that you do possibly with an IRA type of situation. So, and the reason you want to put them into a 401K plan is because one, you typically can put more money in than you can with an IRA and get a bigger tax benefit. And two, you could have like a matching kind of system or situation as well. So if you have access to a 401K or a 403B and you have the cash flow which is obviously a restriction for many people, then you want to max that out if you can because that's a huge tax benefit, tax benefit. Then if you're self-employed, then you might be able to set up like a SEP or a SIMPLE. Again, the benefits here is that it's kind of like a 401K plan for your own self-employed business but you don't have as much of the admin kind of situations that would be involved with a 401K and you could typically put more money into it and get more of a deduction for the IRA. And then if you can't put money into those, then you default basically to an IRA situation where you have less money that you can put in to the IRA. Now, even if you put money into some of like a 401K plan, you might still have access to the IRA but that's where it gets a little, that's where it gets confusing because the limitations and the cutoffs, I get confusing in that situation. So you might have a situation like your sole proprietorship and you have a 401K plan. So if you put some money into the 401K plan, can you still put money into the IRA? Well, it would be nice to have tax salt to help you out with that because there's gonna be income level phase outs and so on that help out with that. What if you're married? What if your spouse has access to the IRA or 401K plan? Does that have an impact on you and what not they could? And so it's nice to have the tax salt to kind of help you out for the IRA to be that last minute resort. So the general idea would be put money as much as you can into whatever retirement plan you can, usually that being the 401K first to 403B if you're self-employed, accept or simple if you have access to those because you could put more money in and then let's actually calculate the tax return before April 18th and see if there's any more money that you could possibly put into an IRA at that point in time based on that calculation and determine if you have the cash flow to put that in for any added benefit. The general idea with any of these kind of retirement accounts is you're putting them under the umbrella of retirement account. You're getting the benefit now in the event of putting money into a 401K plan. They take it out of basically your line one or box one on the W2. So it's already done for you. Your gross income was lowered on line one of the form 1040. If you have an IRA, then we can't take it out of your income line. We have to put it down here and this basically adjustments to income which is kind of like a deduction or you can think about it as a negative income a line item. So that's kind of kind of trying to mirror the same type of thing. And then when you take the money out at retirement that's when you get taxed on it at that point in time. So it's kind of more like a deferral of when you're gonna be paying the tax on it. Also just realized that if you're saving for retirement there's nothing really special about the, a lot of people get this idea that to save for retirement they have the only thing they can do is put money into a retirement account as if there's something like special about it. It's actually not, it's the same kind of investments you would have usually stocks and bonds. You're putting money into mutual funds, index funds. Same thing you would put money into if you didn't have an IRA. But if it's under the umbrella of the IRA you're getting a tax benefit. Otherwise you wouldn't put it into an IRA because the government is restricting the money that you can take out. So if you didn't get a tax benefit you'd still invest in the same stuff you'd still save for retirement but you wouldn't put it into a restricted account where the government's gonna penalize you to take your own money out of your own account. So you're actually restricting your money and you're doing that because they're giving you this tax benefit. So that's the general idea. Okay, IRA deduction. If you made any deductible contributions to a trade individual retirement arrangement, the IRA for 2021 you must report them on form 8606 and just realize that the IRA is pretty easy to set up to. So if someone needs to set up an IRA they could go to any financial institution, their bank possibly set it up. They can go to like some like an E-Trade or something like that to set up accounts for stocks and bonds, mutual funds under the IRA. So it's usually a pretty simple thing to do. So you no longer need to be younger than age 701, 70 and a half, 701, 70 and a half to take a deduction for your contribution to an IRA. If you made contributions to a traditional IRA for 2021 you may be able to take an IRA deduction but you or your spouse if filing a joint return must have had earned income to do so. So you need the earned income basically to take the deduction. If your earned income was quite low then you might say, hey, why would I put money into the IRA because I don't need the deduction in that instance. You might still be able to get a benefit on the accrual or the generation of revenue there but it might not benefit you. In that case you might wanna put money into a Roth IRA because the Roth IRA means that you're not gonna get the tax benefit now but you don't have to pay taxes when you pull it out. So it's kinda like the reverse type of situation. So if your income is low and you're like I don't really need the deduction right now but I wanna put money into a retirement account and I'd like to get a tax benefit then you might think about a Roth IRA. It would be nice at retirement if you had some money into a traditional retirement account 401K, 403B, IRA and some money in a Roth or just stocks and bonds so that when you take the money out you can possibly take it out in such a way that you can have lower taxable income at that point in time while still having sufficient spending cash at that point. So for IRA purposes, earned income includes alimony and separate maintenance payments reported on schedule one, line two A. So there's questions in terms of what is earned income when you're thinking about how much you can put into an IRA. If you were a member of the US Armed Forces earned income includes any non-taxable combat pay you received. If you were self-employed earned income is generally your net earnings from self-employment if your personal services were a material income producing factor. For more details you can see publication 590A so that'll be on the IRS website. Tax software of course is usually quite helpful with this calculation as well. A statement should be sent to you by May 31st, 2022 that shows all contributions to your traditional IRA for 2021. Use the IRA deduction worksheet to figure the amount if any of your IRA deduction but read the following 10 item list before you fill in the worksheet. IRA deduction number one, you can't deduct contributions to a Roth IRA. So the Roth IRA is the reverse of a traditional IRA which you might put money into if you think your taxes are low or if for whatever reason you think you're gonna be taxed more at the end. Maybe you think that you're gonna be spending more at retirement so that your income will be higher so you'd rather get the benefit then or you might think hey, the government's got out of control spending, they're gonna increase tax rates to like 90% at some point or if they wanna avoid bankruptcy so I wanna get the benefit when I pull the money out. Although at that point then they might just say I'm not gonna, the IRA won't be valid anymore if that was really that bad but in any case. But you may be able to take the retirement saving contributions credit, the savers credit, see the instructions for schedule three line four. Two, if you are filing a joint return and you or your spouse made contributions to both a traditional IRA and a Roth IRA for 2021, don't use the IRA deduction worksheet in these instructions. Instead, see publication 590A to figure the amount if any of your IRA deduction. You can't deduct elective deferrals to a 401K plan, 403B plan, section 457 plan, simple plan or federal theft saving plan. So you get tax benefits for those things but they're taken care of in another area. So the 401K plan, if you're an employee will be taken care of by the employer and it'll be basically built into your W-2 on line one will already be having reduced and you'll typically see how much was reduced in another box as well. Same with the 403B, if it's a simple, it's just gonna be on a different line. It won't be an IRA there. So these amounts aren't included as income in box one of form W-2. So those items for the 401K and 403B aren't income for box one because they've been removed for income for federal income tax purposes. If you made contributions to your IRA in 2021 that you deducted for 2020, don't include them in the worksheet. Five, if you received income from a non-qualified deferral compensation plan or non-government section 457 plan that is included in box one of your form W-2 or in box one of form 1099NAC, don't include that income on line eight of the worksheet. The income should be shown in a box 11 of your form W-2 box 12 of your form W-2 with code Z or C 14, box 14 of form 1099 miscellaneous. If it isn't contact your employer or the payer for the amount of the income. Six, you must file a joint return to deduct contributions to your spouse's IRA. Enter the total IRA deduction for you and your spouse on line 20. So if married, then it's possible you could combine deductions. Both could get a deduction. So you got that doubling kind of component related to it. If you're trying to think about the max deduction you could possibly put in. Seven, don't include rollover contributions in figuring your deduction. Instead, see instructions for form 1040 or 1040 SR lines for A and for B. So if you're putting money into a retirement account you can't have like basically it's money in under the umbrella of an IRA already. And you basically rolled it over to another IRA or the more common situation is you have like a 401K plan and then you move from a 401K plan and you stop working for that employer and possibly then wanna roll that money over into something else like an IRA, something that's still under the umbrella of a retirement plan. So you don't have to take it out because if you take it out, they will penalize you. That rollover is not a contribution. You don't get a deduction for the contribution because you already got the deduction when you put the money into the 401K plan. Don't include trustees fees that were built separately and paid by you for your IRA. Nine, don't include any repayments or qualified reservists distribution. You can't deduct them for information on how to report these payments. See qualified reservists payments in publication 590A. 10, if the total of your IRA deduction online 20 plus any non deductible contributions to your traditional IRAs shown on form 8606 is less than your total traditional IRA contributions for 2021. You could see publication 590A for special rules. You must receive at least a minimum amount from your traditional IRA for each year, starting with the year you reach age 72. So in other words, the money you have in the IRA, they're gonna force you to take it out at some point in time because what you have is a deferral of taxes. And so the IRS is gonna say, okay, at some point in time you need to start drawing that money out because we wanna charge you income taxes on it at some point in time. And so they start forcing you to take the money out. So if you don't receive that minimum distribution amount in the year you become age 72, you must receive that distribution by April 1st of the year following the year you became age 72. If you don't, you may have to pay a 50% additional tax on the amount that should have been distributed for details include how to figure the minimum required distribution. So they're serious about taking that money out. You can see publication 590B. Were you covered by a retirement plan? If you were covered by a retirement plan, qualified pension, profit sharing, including a 401K, annuity, SEP, simple, et cetera at work or through self-employment, your IRA deduction may be reduced or eliminated. So here's where the complication comes into play. You can say, hey, you can deduct the IRA but if you have access to one of these other plans then it's gonna be severely limited. So your general advice would be usually you wanna put as much money into these other plans that you can, it's usually more beneficial to do so and then we'll do the calculation to see if you could still benefit from putting more money into an IRA. But you can still make contributions to an IRA even if you can't deduct them. So even if you can't take the deductions you might still put money into an IRA. You don't get as much of a tax benefit but the earnings on the IRA will still be a tax benefit so you still may want to do it in that case. So in any case, the income earned on your IRA contribution isn't taxed until it is paid to you. So the quote retirement plan, end quote box, in box 13 of form W-2 should be checked if you are covered by a plan at work even if you weren't vested in the plan. So how do you know if you're covered in the plan? Well, it'll be have a checkbox on the W-2 that'll show that you have access to this other plan and that if you put money in, it'll show how much money will be put in generally as well. You are also covered by a plan if you were self-employed and had a SEP, simple qualified retirement plan. So if you're self-employed, you might set up similar to a 401K but a more simple kind of plan for a retirement plan, a SEP or a simple type of plan which is similar kind of thing for small businesses. If you were covered by a retirement plan and you file form 2555 or 8815 or you exclude employer-provided adoption benefits, you can see publication 590A to figure the amount, if any, of your IRA deduction. Married persons filing separately, if you weren't covered by a retirement plan but your spouse was, you are considered covered by a plan unless you lived apart from your spouse for all of 2021. So remember that filing separately can cause some kind of complications from time to time when you're thinking about these items.