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Old 03-24-2012, 11:01 AM
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Will opening an IRA avoid paying tax

I owe Federal $1400.00. If I open an IRA can I avoid that and if so how much?


Last edited by KathyK1947 : 03-24-2012 at 11:05 AM. Reason: adding to it


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Old 03-25-2012, 08:48 AM
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“I owe Federal $1400.00. If I open an IRA can I avoid that and if so how much?”----->It depends, you mean traditional IRA, SIMPLE IRA, or SEP IRA??? I guess you mean traditional IRA. You can usually deduct contributions made to traditional IRAs, as traditional IRAs are tax-deferred accounts. You cannot deduct traditional IRA contributions if you or your spouse has access to a retirement plan through an employer and your modified adjusted gross income exceeds the annual limits. These limits vary by filing status and change each year.ALSO, you cannot deduct contributions made to Roth IRAs, however, because Roth IRAs are after-tax accounts.You can reduce your taxable income and tax liability by contributing money to a traditional IRA. Your contribution to an IRA can be made as late as the first due date of a tax return, Apr 15th 2012, and can be considered retroactive to the previous tax year. Unfortunately, you cannot amend a prior return in order to claim an IRA contribution; if you have not filed your 2011 return, you can contribute to an IRA. You can file your 2011 return claiming a traditional IRA contribution before the contribution is actually made. Generally, the contribution must be made by the due date of your return, not including extensions.



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Old 03-25-2012, 02:34 PM
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Will opening an IRA avoid paying tax

Thank you for your answer. From my understanding of your answer it is too late to open a traditional IRA now since my taxes were E-filed. Is that correct? If I were able to do this how much of an IRA would I have to open to get the $1400 down? Thanks again for replying.



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Old 03-25-2012, 03:54 PM
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Thank you for your answer. From my understanding of your answer it is too late to open a traditional IRA now since my taxes were E-filed. Is that correct?”---> You can make a IRA contribution for the previous year 2011 until April 15, 2012 whether or not you filed your tax return. You can still treat the contribution as a 2011 contribution. Generally, you must contribute by the due date of the federal income tax return, not including extensions, which is April 15, 2012 for individual taxpayers. In this case, you would file an amended 2011 federal income tax return to claim the deduction.
“If I were able to do this how much of an IRA would I have to open to get the $1400 down?”---> Your contributions are not a "dollar for dollar" match. instead they reduce the taxable income amount. Your IRA contribution reduces your AGI/TI/Tax Liability, depending on your marginal tax rate. For example, assume that you make a max IRA contributions, $5K, during the year, and your marginal tax rate is 25% , then you can reduce your tax liability by $1,250;$5K*25% as I assume that you take std deduction/single/no dependent.



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Old 03-25-2012, 04:01 PM
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Will opening an IRA avoid paying tax

Thanks again for your replay. I am 65 years old and single. My agi was 53,711 with a taxable income of 12,157. According to work sheet I saw i was in a 15% tax bracket. I know I am being a PIA but I don't understand these things and owing $1400 is a lot of money for me. Someone told me if I opened an IRA I could reduce this. Is that correct? What if I put $1500 in an IRA..how much would that reduce it by? Sorry for being so stupid



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Old 03-25-2012, 04:16 PM
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“I am 65 years old and single. My agi was 53,711 with a taxable income of 12,157. According to work sheet I saw i was in a 15% tax bracket.”---->Correct.Then, your tax liability reported on line 44 is $1,401. You need to use tax table instead of tax rate schedule as your TI, $12,157, is less than $100K.
Please visit the Website here for tax table for 2011; Federal Withholding Tax Table - 2011 IRS Tax Table, Tax Rates
“ I know I am being a PIA but I don't understand these things and owing $1400 is a lot of money for me. Someone told me if I opened an IRA I could reduce this. Is that correct? What if I put $1500 in an IRA..how much would that reduce it by?”--->Assume that you contribute your max IRA contribution, $6,000, then your tax liability will be $501;$1,401-$6K*15%=$501 or $618



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Old 03-25-2012, 05:24 PM
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Will opening an IRA avoid paying tax

Thank you so much for your patience. I did the math and finally understand. I do not have $6000 to invest so I will have to pay the $1400. I do appreciate all your help. God bless you.



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Old 03-29-2012, 07:44 PM
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Will opening an IRA avoid paying tax

Just one more question. I just read the following : To be eligible to fund an IRA for a particular year, you will need to have earned income. For IRA purposes only, earned income consists of wages (reported on a W-2), self-employment income from a business or farm, and alimony. You also must be under age 70.5 years old to contribute to a traditional IRA.

My only source of income is Social Security and a small pension. Is that considered "earned income"?. Does this mean I cannot open an IRA to avoid the full amount of the tax I owe?

I have to borrow the money to open the IRA ($6000.00). How long does it have to stay there before I can return it? Does it earn interest? When I withdraw it do I have to pay tax on it? I remember years ago when I was working I had a similar situation and my account suggested I open what I think was an IRA in a bank for 2-3 years and then I withdrew it and also saved on taxes. Was it the same thing? I don't really remember. Thanks again for your help.



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Old 03-29-2012, 08:32 PM
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“For IRA purposes only, earned income consists of wages (reported on a W-2), self-employment income from a business or farm, and alimony. You also must be under age 70.5 years old to contribute to a traditional IRA.”---->Correct.
“My only source of income is Social Security and a small pension. Is that considered "earned income"?. “---->Sorry both Social Security Benefits and Pension or annuity income are not compensation, not earned income for IRA. None of these items will count for IRA. You can open and make contributions to a traditional IRA if:You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year.
Please visit the IRS Website here for more information: Publication 590 (2011), Individual Retirement Arrangements (IRAs)
“Does this mean I cannot open an IRA to avoid the full amount of the tax I owe “I have to borrow the money to open the IRA ($6000.00). How long does it have to stay there before I can return it? “Does it earn interest?”---->Not sure; I guess you need some professional help from a broker/ an IRA planner.
“ When I withdraw it do I have to pay tax on it? I remember years ago when I was working I had a similar situation and my account suggested I open what I think was an IRA in a bank for 2-3 years and then I withdrew it and also saved on taxes. Was it the same thing?”----->I guess so. IRAs have certain tax advantages, but there may be a penalty assessed against early withdrawals. In general, you can be hit hard with penalty fees if you withdraw money early. All withdrawals made from a traditional IRA are considered by the IRS to be an early withdrawal if they are made prior to the account holder reaching 59 1/2 years of age. After you reach age 59½, you can receive distributions without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 59½, distributions are not required until you reach age 70½. Early withdrawals from either a traditional IRA or a Roth IRA are usually considered to be non-qualified. Non-qualified withdrawals are subject to both ordinary taxation, both federal and state taxes, at the account holder's then current marginal tax rate plus a 10 percent tax penalty on the amount withdrawn. The 10 percent early withdrawal tax penalty cannot be considered as an early withdrawal from savings penalty and may not be included in the taxpayer's itemized deductions. I mean you can’t deduct it on your return. Not all early withdrawals from IRAs are considered to be non-qualified. An account holder may take penalty-free withdrawals from her IRA if she becomes disabled; if qualified early withdrawals may be made to pay for medical expenses not reimbursed that exceed 7.5 percent of the account holder's adjusted gross income; if an account holder may uses funds from her IRA to pay for higher education expenses for herself, her spouse or her dependent children; if you are receiving distributions in the form of an annuity;if you use the distributions to buy, build, or rebuild a first home or etc.
Please visit the IRS Website here( early distributions); Publication 590 (2011), Individual Retirement Arrangements (IRAs)



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