Your income-tax liabilities for a particular year generally are set by the time the clock strikes midnight on December 31. However, there are some last-minute moves you can make in the New Year to reduce your tax bill before the individual income tax filing and payment deadlines in April.
You have until the April 18, 2022, tax-return-filing deadline to contribute up to $6,000 to a traditional IRA and qualify for a potential deduction that can reduce your 2021 taxable income. If you are age 50 or older, the maximum amount you may contribute in 2021 is $7,000. Your eligibility for an immediate tax deduction depends on several factors, including your adjusted gross income, your participation in a workplace retirement plan and your spouse’s access to a workplace retirement plan.
If you participate in a workplace retirement plan and make too much money to receive the benefit of a tax deduction for a contribution in 2021, you may still qualify for a deduction on contributions you make to a spousal IRA, which has higher income limits.
The April 18 filing deadline also applies to contributions to Roth IRAs, which, unlike their traditional counterparts, do not provide an immediate tax benefit in the years of contributions. Rather, account owners pay tax up front on their contributions and receive the benefit of tax-free withdrawals in retirement.
If you are self-employed, you have until May 15 or your business’ tax-filing deadline (including extensions) to set up a SEP IRA for which contributions made by your business may not exceed the lessor of 25 percent of your compensation or $58,000 for 2021. With this type of IRA, the business receives a tax deduction in the years of contributions, and you pay taxes on the money you withdraw in retirement when you are hopefully in a lower tax bracket.
Finally, self-employed individuals have until the April tax filing deadline to make a matching employer contribution to their 401(k) plan of as much as 25 percent of compensation up to a maximum of $58,000 in 2021. Depending on your business structure, those employer contributions may qualify for a tax benefit in the form of deductible business expense.
If you participated in a high-deductible health plan, defined as one with a 2021 annual deductible of at least $1,400 for self-coverage (or $2,800 for families) and maximum out-of-pocket costs of $7,000 for self-only coverage (or $14,000 for family coverage), you may establish and annually contribute pre-tax dollars to a health savings accounts (HSA) that can provide some significant tax benefits.
The money you and your employer put into an HSA reduces your taxable income in the years of contributions and grows with interest and earnings tax-free. Withdrawals you take to pay for qualifying medical expenses, including out-of-pocket deductibles, are also tax-free, and any unused balances can roll over, year-after-year, allowing you to build up significant savings to help pay for the rising costs of medical services and other health care items you may need throughout your life. Some of HAS-eligible medical expenses include acupuncture, weight loss management programs, durable medical equipment and certain over-the-counter medications and personal-care items. As the HSA accumulates savings, you may choose to invest those funds into other investment vehicles, such as stocks and bonds, and allow your HSA balance to grow even further along with your retirement savings.
Whether you can and should take any these actions to reduce your overall 2021 tax liability will depend on your unique circumstances. Speaking with an experienced financial planning advisors and CPAs can help you make the decision that is best for you.
About the Author: Lee F. Hediger is a co-founding director with Provenance Wealth Advisors, an Independent Registered Investment Adviser affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provwealth.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888. Lee F. Hediger is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. All information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. RJFS does not provide tax advice. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement-savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional.
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Posted on March 16, 2022