The deadline for filing federal income taxes is fast approaching, and many people want to know how they can reduce their tax bills and capture the biggest tax returns. One way to do this is by tapping some of the benefits associated with putting money into Independent Retirement Arrangements (IRAs), those personal savings accounts typically created during one’s working years and tapped into during one’s retirement years.

IJM | Ryan CPAs managing director Ryan Kidd. Photo courtesy Ryan Kidd.

IJM | Ryan CPAs managing director Ryan Kidd. Photo courtesy Ryan Kidd.

We reached out to Ryan Kidd, a certified public accountant (CPA) and the managing director of IJM | Ryan CPAs on Mercer Island, to learn more about what you need to know about IRAs as you prepare your taxes.

425 BUSINESS: Have there been any changes to the federal tax code over the past year or two that have impacted IRAs? If so, what are some of those changes, and are they positive or negative for taxpayers?

RYAN KIDD: The most significant impact to IRAs in 2016 related to those individuals over 70.5 years old. In December 2015, the Protecting Americans from Tax Hikes (PATH) Act established a permanent provision that allows those individuals over 70.5 to make a contribution directly from their IRA to a qualified charity, and exclude such contribution from their gross income. Because it went into effect late in 2015, many were unable to utilize this provision. The contribution accomplishes two things: It meets the requirements of being part of any Required Minimum Distribution (RMD), and it can help with tax “gotcha” items such as itemized deduction phase outs, net investment income tax, and the phase-in of taxable Social Security.

425 BUSINESS: Are there a few basic ways that IRA contributions can be used to reduce your tax bill? If so, how?

KIDD: IRA’s and defined contribution plans in general, such as a 401(k), help reduce adjusted gross income. This is the figure before deducting itemized deductions and personal exemptions. Such contributions are very helpful in lowering taxable income.

425 BUSINESS: Is it true you can make contributions to your IRA — and deduct those contributions — right up until the April 18 filing deadline? If so, are there advantages and disadvantages to waiting until the tax deadline to make those contributions?

KIDD: Yes, taxpayers can make IRA contributions up to the filing deadline. Waiting until the deadline can be beneficial since it takes the tax benefit to the year before the deduction is actually made. Conversely, it means the contribution won’t have as much time to grow in the investment. If a taxpayer knows they’re going to make an IRA contribution, it is best to make it as soon as possible in the year so as to maximize potential investment returns. This, however, is generally attributed with what the investment community calls “The January Bounce” in the stock market.

425 BUSINESS: What are two or three general rules individuals should know about IRA contributions and federal income taxes? Are there limits to deductions?

KIDD: There are a few general rules that should be kept in mind. The maximum contribution is $5,500 per year ($6,500 for those 50 and over). Contributions to IRAs can be limited, or not allowed at all, if the taxpayer is participating in a workplace plan, such as a 401(k), and earns more than $98,000. Lastly, the ability to contribute phases out regardless of workplace plans once taxpayers reach an income of $184,000. IRAs can get tricky — it is a good idea to talk with a CPA or an investment advisor that specializes in qualified plans.