From Retirement Now Newsletter 3-3-2022
With the tax season upon us I found a good article about some tax moves you may be able to make to potentially cut your 2021 tax bill.
Now not all of these may apply to your situation as many people in the Retirement Planning Made Easy community are near or already retired. But you may find at least one of them helpful.
The article’s 5 tax moves:
1 Open or add to your traditional IRA. You have until tax day (April 15th) to open or add to a traditional IRA and have it count as a 2021 contribution. For 2021, the contribution limit is $6,000. But if you’re 50 or over it is $7,000. The contribution may be deductible, depending on whether you are covered under an employer sponsored plan (like a 401k) and if you don’t cross certain income thresholds.
2 Contribute to a spousal IRA. If you work and earn income but have a spouse that doesn’t, you can contribute to that spouse’s IRA. The same deductibility rules from Point #1 apply to the spousal IRA as well.
3 Contribute to a self-employment retirement account. The most well known of these is the SEP (Simplified Employee Pension). Quote from the article: “If you are your own boss, even if just some gigs to supplement your regular wages from a company, you can open a retirement account for that money.” A SEP plan can be established before tax filing day and the contribution count towards 2021, so if you don’t have one set up yet you still have time.
4 Claim the Saver’s Credit. This is a dollar for dollar reduction in any tax you owe. You have to contribute to a retirement account to qualify. And you also have to qualify from an income perspective. A lot of tax filers are not going to benefit from this. It is primarily to help lower- and middle-income earners. But the reality is that people in those categories often times don’t have discretionary funds to set aside in a retirement in order to be eligible for this credit. But for those that do qualify for it, the credit is up to $1,000 per person, so joint filers could get up to $2,000.
5 Make HSA contributions. If you have a high deductible health care plan, you may be able to open a Health Savings Account. This may be the most tax-advantaged account in existence… for those that qualify. The contributions are tax-deductible, the growth is tax free, and when you pull the funds out for qualifying health care expenses you pay no tax. However, you have to have a high deductible health care plan to qualify. And if you’re already on Medicare you can’t make anymore contributions to an HSA, but you can use funds from it for some qualifying expenses. For an individual filer you can contribute up to $3,600 and for a family up to $7,200.
Tax season won’t last much longer, just about a month and a half.
Tax accountants do a good job of helping you record what happened in the last year and make sure you report it accurately to the IRS. However, they don’t typically help you be proactive and find ways to smooth off the edges of what you owe the IRS, such as by making recommendations for a Roth conversion due to your low tax bracket, just to give one generic example.
For that, you need someone that will help you with tax planning (not to be confused with tax preparation like what your accountant does).