Last Minute Tax Savings Tips!
Were you anticipating a tax refund this year, but found out you actually owe the IRS (or state, depending on where you live)? Well, there may be some hope! If you haven’t yet filed, there are a few ways you can still reduce your tax liability. Full disclosure: I am not a tax advisor and you should consult your tax professional for advice specific to your situation.
With that out of the way, let’s begin!
Health Savings Accounts (HSAs)
This is probably my favorite option because HSAs are becoming more readily available, have no income limitations, and offer a triple-tax benefit! These accounts allow you to save tax-free, invest tax-free, and withdraw tax-free for qualified medical expenses. The caveat is, you must be enrolled in a High-Deductible Health Plan (HDHP) to participate. For many of us, HSA contributions are automatically deducted from our paychecks (ideal), but you can also contribute independently from your employer.
So, here’s the tax savings tip: You can still contribute to your HSA for 2022 and get a tax deduction if you did not max out your HSA last year. You have up until the tax filing deadline (April 18, 2023) to make any final contributions to reduce your tax liability for 2022. The maximum you can contribute in 2022 is $3,650 for individuals and $7,300 for family coverage.
For example, let's say that you started a new job in October 2022 and as an individual, contributed $1,500 to your HSA. Note: If you keep the same plan next year, payroll contributions would continue, but they go towards tax year 2023. In this case, you could contribute directly from your bank account into the HSA, ensuring that you select 2022 as the contribution year. Assuming your employer makes no HSA contributions on your behalf, you would have $2,150 left ($3,650 - $1,500). This brings up a really important point: any employer contributions count toward the maximum, so be sure you subtract that amount first before calculating the remainder. In this example, if your employer contributed $500 in 2022, you would only have $1,650 left ($3,650 - $1,500 - $500).
Similar to HSAs, if you did not contribute the full allowable amount to your IRA last year ($6,000 if under age 50, or $7,000 if age 50 or above), you have up until the tax filing deadline to do so. To deduct contributions to a Traditional IRA, however, there are some requirements that must be met.
Are you or your spouse an active participant in an employer-sponsored retirement plan? Some common examples are a 401k, 403b, SIMPLE IRA, and even a pension. If you (single) or both (married) are covered, including someone contributed on your behalf, please skip to question #3.
What is your filling status? If you file Single and are not active in an employer plan, you are able to deduct the full amount. If Married Filing Jointly (MFJ) and neither one of you is active in an employer plan, you are also able to deduct the entire amount. It gets tricky though, when only one of you is covered (see #3).
What is your income (Modified Adjusted Gross Income, or MAGI, to be exact)? If MFJ and only one of you is covered, you are limited based on your income, up to $214,000 in 2022. If you file Married Filing Separately (MFS), your income cannot exceed $10,000 (yikes). Please refer to this IRS table: https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-not-covered-by-a-retirement-plan-at-work. If you are covered as a single person, or both of you are covered if married, the income thresholds get even smaller. Here is the IRS table for those amounts: https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
The above is referring only to when you are able to deduct your Traditional IRA contribution in whole, in part, or not at all. Anyone with earned income can contribute to a Traditional IRA, but being able to deduct it is when the above rules come into play.
Also, please keep in mind that any and all IRAs, including Roth IRAs, are subject to the annual contribution limit. For example, you are not able to contribute $6,000 to a Traditional IRA and $6,000 to a Roth IRA within the same tax year. You may even choose to contribute to the Roth IRA and forgo the deductible Traditional IRA even if you are eligible because you anticipate you will need the tax break later vs. now.
For my business owners out there, you have the biggest possible deduction of all! Opening a SEP IRA can be helpful if you find yourself making a lot of money and staring down a significant tax bill because whoops, you didn’t know you had to pay estimated taxes. Well, lucky for you, there is a potential solution (as long as you didn’t blow all of your profits).
You must set up and contribute to the SEP prior to your company’s tax filing deadline. For most, this is April 18, but it could later if you ask for an extension. If you have employees, you must make contributions on their behalf. If it’s only you, you simply make contributions to your account. Why is this the best solution for those who want to lower their tax bill? Because the maximum contribution to a SEP IRA in 2022 is up to 25% of employee compensation, or $61,000! That can certainly help with taxes as long as you have the funds to cover it.
If you qualify for one or more of these last minute tax savings tips, please consult with a qualified tax professional to ensure you are making the best use of these strategies. Of course, I am assuming that you have some extra money lying around and want to make the best possible decision on how to use it. These are legitimate ways to save on taxes and do not at all imply that you should not pay income taxes. However, when the options are available, we should be informed and employ the best strategy for our situation.
If you do find yourself with a huge, unanticipated tax bill without the money to pay it, contact the IRS to see if you can set up an installment plan. Filing an extension does not mean you can wait to pay what you owe. It only means you need more time to file your return. Any taxes owed are due by the normal deadline.
Tax planning is not something we only do in December. It must be planned for throughout the year. Tax laws change often, so it’s important to stay up-to-date. Unfortunately, the IRS doesn’t care if "you didn’t know about it". Planning is a year round exercise and working with a financial and/or tax professional can help you be much better prepared once tax time rolls around! Happy filing!