Here’s What One Expert Says You Should Do Before the New Tax Deadline
The new tax filing deadline of May 17, 2021 set by the IRS last week gives taxpayers more time to save if they realize they will owe taxes this year. It also gives individuals an opportunity to use time-tested tactics to reduce their tax liability prior to filing. “Taxpayers have an extra month to max out retirement accounts,” says Tony Molina, CPA and senior product specialist at Wealthfront, a fintech firm. “The new filing deadline gives you another month to hit the maximum contribution of $6,000, and any little bit extra you can add can make a big difference in saving for retirement,” Molina says.
Contributions to a Roth individual retirement account won’t directly lower your tax liability because all contributions are made post-tax, Molina explains, but there are three other types of accounts that could reduce your tax bill or increase your tax refund this spring.
Max Out Traditional IRA Contributions for a Larger Tax Deduction
If you are below age 50, you can contribute up to $6,000 to a traditional IRA. These contributions are tax deductible up to a certain limit, depending on your income. If you are age 50 or older, you can contribute up to $7,000 annually.
If your job doesn’t offer a retirement plan, you can deduct your full IRA contribution for 2020 on your taxes. Unlike many other deductions, you have until the filing deadline to make your contributions for that tax filing year. In the event your company does offer a plan, you can still deduct a portion of your IRA contributions based on your salary and filing status.
For instance, single taxpayers and heads of household can deduct the full amount from their adjusted gross income if they make less than $125,000 per year, according to the IRS. As of this writing, contributions phase out until you can no longer deduct IRA contributions if you make $140,000 or more. Married couples filing jointly can deduct the full amount if they make up to $198,000, and deductions phase out fully at $208,000.
Max Out Your SEP IRA for Tax Advantages
Self-employed individuals don’t have to rely on a Roth IRA with limited tax advantages for retirement savings. A SEP IRA, or a Simplified Employee Pension, is a traditional IRA for self-employed individuals and small business owners.
Most companies don’t offer SEP IRAs to their employees because business owners are required to match employee contributions with this type of retirement plan. However, if you work for a small business that offers this plan, it’s wise to take advantage because you’re accessing free contributions from your employer.
“The SEP IRA allows contributions up to $57,000 or 25% of your income, whichever is less, and is treated the same way as a traditional IRA when it comes to filing your taxes; it reduces your adjusted gross income and therefore your overall tax liability,” Molina says.
Invest in Your Health Savings Account Before Time Runs Out
If you have a qualified high-deductible health plan, a health savings account lets you contribute pre-tax money to the account. You can tap into that money for co-pays, glasses or contact lenses, prescription and over-the-counter drugs and other healthcare expenses throughout the year.
“Money goes into an HSA pre-tax, which lowers your taxable income,” Molina explains. “The maximum you can contribute in 2020 is $3550, which means you could lower your taxable income by that amount if you are able to max it out.”
If you’re looking to reduce your tax bill for your 2020 returns, or even plan ahead for 2021, maxing out any or all of these accounts could be a wise way to spend your extra stimulus funds, providing you are caught up on bills and not facing extensive, high-interest credit card debt.
“You now have until May 17 to contribute for the 2020 tax year,” Molina emphasizes. “That means extra time to add more contributions, and even if you don’t contribute the full amount, any contribution could help lower your tax bill.”
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