Save on Last Year's Taxes Right Now
Did you know that you can make money moves this year that can help you save on last year’s taxes?It's true.
Linsey’s post on procrastination and tax tips reminded me that procrastination can pay, specifically in the form of a lower tax bill. If you hurry or file an extension, you can reduce your income and your tax liability.
Fund tax-advantaged accounts (HSA, SEP-IRA, IRA)
Health Savings Account
(Form 1040, Line 25; plus Form 8889, Line 2): You’ll need to have a high-deductible health plan that is linked to your HSA. See your plan and IRS info for details, but, generally, you can fund the account up to the amount of your annual deductible.
(Form 1040, Line 28; Form 560): As long as you have earned income from your business, self-employment, or freelance work, you can contribute to a self-employment retirement plan, such as a SEP-IRA. First, you’ll need to open an account with your favorite financial institution or brokerage firm. The money doesn’t have to flow directly from your business checking account to the retirement account; any extra cash you happen to have can fund your SEP-IRA. Contribution limits are based on IRS caps and your income.
(Form 1040, Line 32): If you (or your spouse) have earned income, you can contribute to an IRA. Similar to the SEP-IRA, you’ll need to open an account, you don’t have to fund the account directly from your paycheck (you could actually sell investments in a regular account and fund the IRA with the proceeds), and contribution limits are based on IRS rules and income.
Specify applicable tax years on contribution forms and tax forms. And, if you haven’t yet opened these or similar accounts, check the IRS website and financial services providers for deadlines. Funding may be possible only if the account is already established (see page 3 of Form 560).
If you’ve had a significant drop in income or reduced your income substantially through perfectly legal methods, you may be eligible for tax breaks this year (which you might not have qualified for at higher incomes):
- Medical Expenses: If you itemize deductions and you have high medical expenses relative to your income, then you can deduct the amount over 7.5% of your income. For example, if your income is $80,000, then you’ll need to have more than $6,000 in medical expenses to reap a tax benefit. However, if you’ve suffered a job loss mid-year and have income of $40,000, then you’d need just over $3,000 to benefit.
- Job Search Expenses: Similar to medical expenses, you need to itemize deductions, and job search expenses must exceed a certain percentage of your income (over 2%) to get a tax benefit. But a lower income will mean a lower threshold and greater likelihood that you'll have qualifying expenses.
- Long-term Capital Gains(Schedule D): If you can lower your income enough, you might get a tax rate of 0% on long-term capital gains.
If you can't make these moves by April 15, then you can file an extension. Retirement funding is available for certain accounts up to the due date of your return, which includes the extended date. Just make sure you go ahead and pay taxes due now.
Consult your CPA or tax professional for details on your personal tax situation.