You're working on your tax return and discover you owe Uncle Sam more than you expected.
It happens. And in most cases, you're stuck with that larger Internal Revenue Service bill.
After all, the 2019 tax year is long gone. It's too late to make those year-end moves that could have helped cut your tax bill.
But wait!
In a couple of instances, you still might be able to reduce last year's taxes with some tax saving moves that are allowed as late as the April 15 filing deadline.
You can make a potentially tax-deductible contribution to a traditional IRA.
A similar tax break is available if you have a health savings account, a tax-favored account used to pay medical expenses.
IRA savings for retirement and on current taxes: Since the day I can quit working is always top of my mind, I'm starting with the retirement consideration.
If you make money, you can put some of those earnings into an IRA, commonly known as an individual retirement account although the official name is individual retirement arrangement.
Roth IRAs are the favorite of many taxpayers. With a Roth, the already taxed contributions grow tax-free and there's no tax bill when you withdraw it in retirement.
But traditional IRAs still have fans, mainly because these tax-deferred accounts can offer an immediate tax break.
Whether you can write off your traditional IRA contribution — which could be as much as $6,000 for the 2019 tax year; $7,000 if you're age 50 or older — depends on your earnings, your marital status and whether you and, if married, your spouse have a workplace retirement plan.
You can find more about how these factors affect your contribution (and deduction) in my earlier post on retirement plan inflation adjustments.
Easy to claim: If, after assessing your personal situation and running the numbers, you find you can deduct some or all of your traditional IRA contribution, the hard work is done.
You claim the IRA contribution amount without having to itemize.
It's what used to be known as an above-the-line deduction — officially, it's an adjustment to income — and you enter it directly on Form 1040 Schedule 1. No receipts or other documents to track, no Schedule A to complete and attach to your return.
And you can make that tax-deductible contribution for the previous tax year as late as next year's April 15 filing deadline.
What if you meant to open an IRA last year, but never got around to it? No worries.
You have until April 15 to open your traditional IRA for the prior year, fund it and count the deductible contribution against your 2019 taxes.
Similar HSA tax benefits: An HSA offers the same tax saving timing as a traditional IRA.
An HSA is a medical spending account that is available in connection with a high-deductible health plan (HDHP). As the name indicates, these medical policies require more out-of-pocket payments from you.
But you can cover the added HDHP costs with the money you put into your HSA.
If you got your HDHP plan through your employer, you'll probably be able to establish an HSA there, too. If your HDHP was purchased independently, you can sign up for an HSA at your bank or other financial institution.
Once established, an HSA offers three big tax savings:
Interest earned on an HSA is tax-free, as are withdrawals for qualified medical expenses.
Even better, contributions typically are tax-deductible.
Best, the deadline for making a deductible HSA contribution for a particular tax year is that tax year's filing deadline. That's not until mid-April of the next year.
So for 2019 tax purposes, your deductible 2019 HSA contribution (like the one to your traditional IRA) can be made as late as April 15, 2020.
As with IRAs, the amount you can contribute to an HSA is adjusted annually for inflation.
The 2019 limit for HSA contributions is $3,500 for single taxpayers and $7,000 families. You can put in an additional $1,000 if you're age 55 or older.
Deduction similarities, differences: Just like a traditional IRA deduction, you claim your HSA contribution on Form 1040 Schedule 1 as an income adjustment/above-the-line deduction.
But there's an important difference to note here.
While you can open an IRA (either traditional or, if the deduction doesn't matter to you, Roth) for the prior year as late as April 15 of the following year, your HSA already must be established in the previous tax year before you can take post-Dec. 31 advantage of any contribution.
In either traditional IRA and HSA situations, if you haven't maximized your 2019 contributions to these tax-favored accounts, consider doing so this year.
You can use the next few months before the filing deadline to come up with the cash for the accounts so that you get the biggest tax break you can.
You also might find these items of interest:
- Ways to pay Roth IRA conversion taxes
- Medical tax provisions affected in 2020 by inflation
- IRS guidance expands high deductible health plan HSA options for chronic medical conditions
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