The Top 10 Things for 18-25 Year-olds to Know About Taxes
5) Individual Retirement Agreement (IRA) Deduction
This is a double-whammy in a good way. You could save for your retirement AND reduce your taxes. How? Read on:
If your income is less than $26,500 you may get a retirement saver’s credit of up to $1000 for contributions to an IRA. The catch here is that you can’t be a full time student to get this credit.
If your income is under $63,000 and you’re eligible for a retirement plan with your job, you can make a contribution of up to $5000. However, if your income is $63,000 or more, you won’t get to deduct it. See http://turbotax.intuit.com/tax-tools/ and click on the IRA Calculator to figure out how much you can deduct on your tax return (not a shameless plug—just a freakin sweet tool).
A final word on IRAs: If you aren’t eligible for a retirement plan, it doesn’t matter how high your income is—you can contribute and deduct up to $5000. The nice thing about this is—deductions reduce your income. And deducting your income reduces the amount of taxes you have to pay. Not to mention the fact that having a retirement fund might work out better for you than working at a burger joint when you’re 80.
Stay tuned for my next installment. I’ll be talking about what paperwork you’ll want to have with you when you actually sit down to file.