Retirement accounts can still work to take a big bite out of your tax bill

February 16, 1992|By Gary Klott | Gary Klott,Contributing Writer

One of the most lucrative ways still left to cut 1991 income tax bills is to contribute to a tax-deductible retirement account.

Recent changes in the tax law have made the benefits of doing so even greater this tax season.

Although Individual Retirement Account deductions were curtailed several years ago for many middle- and upper-income taxpayers, the vast majority of American workers are still eligible for at least a partial IRA deduction. And anyone with self-employment income, including employees with sideline businesses, can earn sizable deductions by contributing to Keoghs or Simplified Employee Pension (SEP) plans.

IRA deductions range up to $2,000 for individuals, $2,250 for one-income couples and $4,000 for working couples. Plans for the self-employed offer deductions of up to 20 percent of self-employment earnings, up to a maximum $30,000.

Besides earning a large deduction, contributing to retirement accounts can also inflate some of your other deductions. The reason is that IRA, Keogh and SEP deductions reduce your adjusted gross income, which in turn can increase various tax benefits whose size is linked to adjusted gross income.

In recent years, Congress has expanded the list of tax benefits that shrink as adjusted gross income rises. Among them are the deduction for medical expenses, job and other "miscellaneous" itemized deductions, the dependent-care credit and rental losses. And, starting with 1991 returns, upper-income taxpayers will have most of their itemized deductions slashed by 3 percent of the amount their adjusted gross incomes exceed $100,000.

Besides saving on federal taxes, retirement deductions can reduce state tax bills.

IRA eligibility

Couples with adjusted gross income below $50,000 and single individuals with adjusted incomes under $35,000 are eligible for at least a partial IRA deduction. A full deduction can be claimed by couples with adjusted incomes below $40,000 and single individuals with incomes below $25,000.

Regardless of income, a full IRA deduction is also available if neither you nor your spouse is covered by a retirement plan at work.

Taxpayers have until April 15 to make IRA contributions that will qualify for deductions on 1991 returns.

Self-employed plans

Self-employed individuals have until the due date of their returns, including filing extensions, to make a contribution to a Keogh or SEP plan.

How much you can contribute to a Keogh depends on what kind of plan you set up. Deductible contributions can be as much as 20 percent of your self-employment earnings if you have a "money-purchase" Keogh, which requires a fixed percentage of your income to be contributed each year.

With "profit-sharing" Keoghs, where the size of contributions can vary each year, contributions are limited to 13.043 percent of self-employment earnings. In either case, contributions cannot exceed $30,000.

For Keogh contributions to qualify for a deduction on 1991 returns, your Keogh plan must have been set up by last Dec. 31.

If you missed the deadline, SEPs can help. SEPs can be set up any time until the due date of your return. But you won't be able to earn as large a deduction as you can with a money-purchase Keogh. With a SEP, contributions are limited to 13.043 percent of your self-employment earnings, up to a maximum $30,000.

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