Q: My husband didn’t work last year, but we’d like to contribute to an IRA for him to lower our taxes. We’re in a higher-than-usual tax situation this year. Is this allowed? Also, I participate in a retirement plan at work. Does that change things?
A: Yes, you can contribute to his IRA even though he didn’t work. It’s called a spousal IRA. His contribution limit for tax year 2024 is $7,000, plus an additional $1,000 “catch-up” contribution if he’s over 50. You have until tax time to make his contribution.
Whether his contribution is actually tax-deductible will depend on your family’s overall income. Since you are in a retirement plan at work, it affects the deductibility of his IRA contribution. For 2024, for married couples the deduction is fully phased out at $240,000 of adjusted gross income.
If you exceed this income limit, you can still make a contribution for him, but it would be non-deductible. To better plan for this year, you might double check to see if you are actually maxing out your own retirement plan contributions.
Q: We had a big income year in 2024, but 2025 will be much lower. We don’t think we need to make estimated tax payments this year based on last year’s income. How do we make sure we pay the right amount and avoid any penalties this year?
A: The IRS’ estimated tax rules offer flexibility, but getting it right takes some work.
To avoid penalties, you need to meet a “safe harbor” rule. One option is to pay 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000). Since your 2024 income was high, this could cause you to pay way too much tax along the way. With interest rates on savings still pretty attractive, letting the government have that money ahead of time isn’t the smartest move.
A second option is to pay at least 90% of your actual 2025 tax liability. This avoids overpaying but it does mean you’ll have to do some tax planning throughout the year. If your estimated tax payments end up being too low, you could get hit with a penalty.
If you’re retired, it might make sense to adjust your tax withholding on your IRA withdrawals or even your Social Security or pensions payments instead of making estimated payments. The IRS treats this type of tax withholding as if it were paid evenly throughout the year. This way, you can wait until later in the year to do your tax projections, rather than make those large tax payments during the year.
While it can be a pain, checking your numbers throughout the year and making adjustments will help. It’s far less of a pain than paying those underpayment penalties!
