Post Dec 31st Tax Moves to Reduce Your Current Tax BillJan 10, 2022
Post Dec 31st Tax Moves to Reduce Your Current Tax Bill
It is not too late to lower your tax bill even after the new year begins. There are moves you can make after December 31st that can optimize your taxes for the prior year. Knowing you are making the most of all the savings account types provides the confidence and peace of mind from knowing your long-term financial plan is on course.
We outline five strategies that can go a long way toward boosting your tax refund and your long-term savings:
- Retirement Contributions. IRA contributions for the prior year can be made up until the tax deadline. Often, it’s easier for people to prepare their taxes, then see if they are better off making traditional (pre-tax) contributions or after-tax Roth IRA contributions. Individuals can also optimize their taxes by performing Roth conversions (Click here to download our guide to learn when and how to do Roth conversions for maximum results). What’s more, small business owners can contribute to a Solo 401(k) or SEP or SIMPLE IRA using similar strategies.
- Catch-up Contributions. Are you 50 years of age or older? If so, you may be eligible to make catch-up contributions to your IRA. Each year, the IRS refreshes IRA contribution limits as well as the catch-up contribution amount. Catch-up contributions allow pre-retirees (who might have lower expenses once kids are out of the house and a mortgage that is paid off) an extra retirement savings boost.
- Spousal IRA. A spousal IRA is a strategy that allows a working spouse to contribute to an IRA in the name of a non-working spouse. That way, the non-working spouse—who perhaps stays at home—can grow his or her retirement savings despite having little or no income. This retirement account goes a long way toward relieving the financial anxiety of couples with just one primary breadwinner. Prior-year spousal IRA contributions, like other IRA contributions, can be made through the tax deadline (often April 15th).
- Health Savings Accounts (HSA). An HSA can be used as a long-term savings vehicle in addition to being a source of funds to cover health-related expenses. HSA contributions are often made through an employer—which features the added benefit of escaping payroll taxes. Individuals and families can make HSA contributions on their own, too. As with an IRA, current year and prior-year contributions are allowed. This is another opportunity to lower your prior year’s tax bill since contributions are tax-deductible and the account grows tax-deferred. Withdrawals are also tax-free if they pay for health-related items. At age 65, you can tap an HSA for non-health reasons without facing a penalty (you would just pay income tax on distributions as you would with traditional IRA distributions).
- College Savings. 529 college savings plan contributions can be marked for the prior year in some states. Be sure your state-sponsored plan is on that list. While 529 contributions do not offer an up-front federal tax deduction, some states do, which could lower your state income tax bill with 529 contributions.
Remember: finance is simple when you have a little bit of know-how. If you have questions about this article, put them in the form below.
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