I thought I'd do some posts for tax planning.

First up, Individual Retirement Accounts and Self Employed IRAs. (SEP IRA)

Eligible Compensation
To contribute to an IRA, you must first have eligible compensation. This includes wages, salaries, tips, sales commissions, taxable alimony, or maintenance payments received under a divorce decree or separation agreement. If you are self-employed (as a sole proprietor or partner), eligible compensation includes net earnings from your business, minus contributions made to any retirement plan, and the deduction allowed for self employment taxes.

Not all income qualifies. Rental income, interest, dividends, pension, or annuity income, as well as deferred compensation payments and any amounts you exclude from your income, are not considered eligible compensation for IRA purposes.

Maximum Contribution
For 2020 and 2021, the maximum allowable IRA contribution is $6,000. Taxpayers at least 50 years of age in the year for which the contribution applies can also make a catch-up contribution of another $1,000.

If your eligible compensation is less than the $6,000 limit (or $7,000 if you're over 50 years old), then you are permitted to contribute only up to the amount you earned for the year.

For example, Amy, a full-time college student, earned $2,000 from her part-time job in 2019. She also earned $1,500 in dividends and interest on her investments. Amy can contribute only $2,000 to her IRA for 2020 because that is the amount he earned in eligible compensation.

Age Limitation
Previously, taxpayers who were 70½ years of age or older could not contribute to a traditional IRA. But as of Jan. 1, 2020, this age limit no longer applies. This greatly helps individuals save towards retirement, as people are living longer and thus working longer.

Contribution Deadline
Typically, taxpayers have until the April 15 tax filing deadline to make an IRA contribution for the prior tax year. Deadlines for SEP IRA contributions work a bit differently. Taxpayers can make a SEP IRA contribution as late as the due date (including extensions) of the return. So, in a typical year, if you file for a six-month extension, you would have until Oct. 15 to contribute.