Tax Day is fast approaching. But if you’re shuddering at the thought of a big bill, there may still be a few things you can do to shield some of your money from the IRS.
Your deadline for many of the financial moves that could lower your taxable income in 2023 was Dec. 31. For example, it’s too late to fund a 401(k) for 2023 or purchase a new EV and apply the $7,500 credit to your 2023 taxes. But there are a few options for reducing your 2023 taxable income that you can do up until Tax Day, which is April 15, 2024.
1. Contribute to a traditional IRA
If you fund a traditional IRA, you may be able to deduct your full contribution. The maximum contribution for 2023 is $6,500, or $7,500 if you’re 50 or older.
The rules for deducting traditional IRA contributions are a bit complicated. In a nutshell, you can deduct your full contribution if neither you nor your spouse is covered by a workplace retirement plan, regardless of your incomes. But if you or your spouse has a workplace retirement plan, income restrictions apply to the tax deduction.
Note that you can also fund a Roth IRA for 2023 up until Tax Day. But because Roth IRAs are always funded with after-tax dollars (growth and withdrawals are tax-free, though), you won’t get an immediate tax break on your contributions.
2. Fund your HSA
You can still max out your health savings account (HSA) up until Tax Day. The maximum 2023 contribution is $3,850 for self-only coverage or $7,750 for family coverage, plus an extra $1,000 if you’re 55 or older. Any employer contributions you receive count toward those limits, so if you have self-only coverage and your company kicked in $1,000, you can only save $2,850 for 2023.
To fund an HSA, you need to have a high-deductible health plan (HDHP). The best part about an HSA: Not only can you deduct your contributions, but your withdrawals are always tax-free as long as you use them for qualifying medical expenses.
3. Contribute to a SEP IRA
If you’re self-employed or work as an independent contractor, even if it’s just as a side hustle, you can still contribute to a SEP IRA, which is an IRA designed specifically for self-employed people, small business owners, and freelancers.
You have until April 15, 2024, to fund a SEP IRA for 2023, or whenever your business’s taxes are due. If you file for a tax extension, you get even more time to make SEP IRA contributions. For example, if your business taxes are due April 15 and you receive an extension, you can fund your SEP IRA for the 2023 tax year until Oct. 15, 2024.
For 2023, you can contribute up to 25% of your self-employment earnings or $66,000 — whichever is less. You can fund your SEP IRA even if you’ve made the maximum contributions to a Roth or traditional IRA for the year.
The bottom line on lowering your taxable income
All of the options above allow you to lower your taxable income, but they also require you to effectively lock away your money. Early withdrawals from a pre-tax retirement account will usually result in income taxes plus a 10% penalty.
The penalties for non-medical withdrawals from an HSA are even steeper: You’ll pay income taxes, plus a 20% penalty on withdrawal on funds that aren’t used for a qualifying medical expense if you’re under 65.
In short, any of these options for reducing your tax bill require you to have money that you can afford to part with for now. If you’re worried that you can’t afford your taxes, you should still file a tax return and pay what you can. The IRS has several options for low-cost payment plans that can help get you on track.
But be sure to file your return by April 15 or request an extension. The failure-to-file penalty is much more expensive than the failure-to-pay fee.
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