Last Minute Tax Deductions to Take Right Before Tax Day
Every April, Tax Day arrives. With it comes the stress of hoping you filled out your tax return correctly and the pain of owing money, or the happiness from getting money back from Uncle Sam.
As Tax Day approaches, you might be looking for a way to get a bit more back from the government, or to reduce the size of your tax bill. Here are a few last-minute actions you can take to get a tax deduction.
1. Contribute to an IRA
One of the easiest last-minute tax deductions to get is the IRA contribution deduction. This is because the deadline to contribute to an IRA is the same as the due date for your taxes. Even if you don’t set up your IRA until 2023, so long as you make your contribution before Tax Day, you can classify the contribution as a 2022 contribution and take the deduction (applies only to traditional IRAs, not Roth IRAs. The only eligibility requirement is that you have earned income in the year for which you’re making contributions.
Individual Retirement Accounts (IRAs) are specifically designed to help people save for retirement. There are restrictions on how much money you can contribute each year, and when you can get the money back.
Specifically, you can contribute up to $6,000 for the 2022 tax year. This contribution amount goes up to $6,500 for the 2023 tax year. If you turned 50 or older in 2022, you can make an additional $1,000 in catch up contributions.
Once you place money in an IRA, you cannot withdraw the money until you turn 59½. If you withdraw the money before that time, you’ll owe a 10% penalty on whatever amount you withdraw.
So, why contribute to an IRA? Because you’ll get to reduce your taxable income by the amount you contribute. That can reduce your tax bill by a significant amount.
Consider this example:
After accounting for all other deductions, you have a taxable income of $50,000. That means your total federal tax bill will be $8,238.35. If you contribute $6,000 to a traditional IRA, you’ll reduce your taxable income by 10%, to $4,500. As a result, you will reduce your tax bill by $1,245.50 to a total of $6,992.85.
Saving $5,000 towards your retirement will cost you less than $4,000 because the government wants to help people have a secure retirement.
Of course, you don’t get the tax benefit for free. Traditional IRAs are a tax-deferred account. That means that you’ll pay income tax on the money when you withdraw it from the IRA. This still results in net savings because most people earn less in retirement, and thus pay a lower tax rate.
The Saver’s Credit
Another benefit of contributing to an IRA is that you might get a tax credit on top of the normal tax deduction. If your income is low enough, you can qualify for the Saver’s Credit with your IRA contributions. The Saver’s Credit reduces your tax bill, or refunds you, by a percentage of your contribution.
The eligibility requirements, based on your adjusted gross income (AGI) are as follows:
The Saver's Credit eligibility requirements for 2022
|Credit||Married Filing Jointly||Head of Household||All Other Filers|
|50% of your contribution||Not more than $41,000||Not more than $30,750||Not more than $20,500|
|20% of your contribution||$41,001 - $44,000||$30,751 - $33,000||$20,501 - $22,000|
|10% of your contribution||$44,001 - $68,000||$33,001 - $51,000||$22,001 - $34*,000|
The Saver’s Credit applies to the first $2,000 you contribute to an IRA or other retirement plans each year ($4,000 if married filing jointly). So, if you are a single person who makes less than $31,000, and contributes $1,000, you’ll get a $100 credit. If you contribute $2,000, you’ll get a $200 credit. After that, you’ll continue to receive the $200 credit no matter how much more you contribute.
2. Contribute to an HSA
Health Savings Accounts (HSAs) are a special type of account designed to help Americans save for future medical expenses.
HSAs are one of the best tax-advantaged accounts out there because you never have to pay taxes on the money you contribute so long as you use the money for medical expenses. If you withdraw the money for a non-medical expense, you’ll pay a 20% penalty.
Not everyone can open an HSA. To be eligible for an HSA, you must have a high-deductible health insurance plan and not be covered by another type of insurance. The deadline to make an HSS contribution is the same as the due date for your taxes.
For 2022, you can contribute up to $3,650 to an HSA covering an individual. HSAs that cover a family have a contribution limit of $7,300. If you’re 55 or older, you can make an additional $1,000 in contributions in either case.
Even if you don’t expect to have significant medical bills in the near future, you should still consider making an HSA contribution. You never know when a medical emergency could strike, and if one does, you’ll be happy to have the savings.
In the best case, where you never have a significant medical expense, you can still withdraw your money from your HSA. When you turn 65, you can begin making withdrawals from your HSA as though it were an IRA, without paying the 20% penalty. This means you can treat your HSA almost like a second IRA.
3. Contribute to a Qualified Retirement Plan
Qualified retirement plans, like 401(k)s and pension plans also offer tax advantages to people who participate. These accounts are tied to employers, so they are less flexible than IRAs, but they function largely the same. You make contributions to your employer’s retirement plan on a pre-tax basis. If you contribute $2,000, you can reduce your taxable income for the year by $2,000.
There are two major advantages to using employer-sponsored retirement plans.
The first is that the contribution limits on these plans are far higher than the limits on IRAs. 401(k)s, for example, allow you to contribute $20,500 per year to the plan in 2022 ($22,500 in 2023). That’s more than triple the contribution limit offered by IRAs.
Another benefit is that many employers will match contributions that you make, to a point.
Consider this example:
You make $60,000 per year, and your employer will match contributions, up to 3% of your salary. That means, that if you contribute $1,800 to your 401(k), your employer will also add $1,800. That’s like getting an instant 100% return on your investment.
Different qualified retirement plans have different contribution deadlines. Look at the plan documents for your plan to determine when you must make your contribution.
4. Set Up a SEP IRA or Small Business Retirement Plan
If you are a small business owner, you should take the time to set up a SEP IRA or similar small business retirement plan.
The benefits of a small business retirement plan are two-fold. You can save money both on your personal taxes and your business taxes.
The SEP IRA is the easiest account to set up, requiring very little in the way of paperwork or annual upkeep. It functions much like a traditional IRA, allowing the employee, meaning you, to contribute up to $6,000 per year. It also allows the employer, which in the case of a self-employed person, is the same as the employee, to make contributions.
The employer contributions for a self-employed person with a SEP IRA cannot exceed $61,000 or 20% of your earnings for the year, whichever is lower. The amount rises to $66,000 for 2023.
If you’re self-employed, you should aim to make the maximum possible employer contribution to your SEP IRA. On top of the savings from not including the income on your tax return, you’ll save on self-employment taxes. As a self-employed individual, you are responsible for both the employer and employee contributions towards Social Security and Medicare (FICA) taxes. If you make an employer contribution to a SEP IRA, you don’t have to pay those taxes on the contributions. Given that the FICA tax rate for self-employed persons is just over 15%, that’s a huge savings.
File for an Extension
If you’re having trouble with filing your taxes and making sure that you got all of the information surrounding your deductions correct, don’t be afraid to file for an extension. The deadline to file for an extension is the same as the normal due date for tax returns.
You don’t need to provide a reason for filing for an extension, the government will just give you the extra time you need. Extensions last for as long as six months, giving you until October to file your tax documents.
One important thing to note is that this extension applies only to the paperwork. You still have to pay your bill by the April deadline. If you don’t make a payment and wind up owing taxes when you do file your taxes after the April deadline, you may pay severe penalties.
The best thing to do is to complete your taxes as well as possible before the initial deadline and make a payment based on those calculations. You can then file for an extension and take the time to make sure you did everything correctly, before filing the paperwork over the summer or fall.
Tax season is a stressful time for Americans. Knowing some last-minute deductions that are available to you can help you save some money by reducing your bill or increasing your tax refund.