IRS Reprieve Offers Opportunity for Last-Minute Tax Savings

The IRS has provided taxpayers with a slight reprieve this year by extending the traditional April 15 tax-filing deadline by three days. As a result, you have until next Tuesday, April 18, to file your tax return or request an extension.

This means you also have an extra three days to make a 2016 contribution to your IRA, SEP or HSA and thus potentially reduce your 2016 taxes. Contributions made up to the tax-filing deadline can be counted for either tax year 2016 or 2017.

Retirement Plans and Taxes

If your modified adjusted gross income (MAGI) is less than $61,000 — or if you don’t participate in a qualified retirement plan at work — your traditional IRA contributions could be fully deductible on your federal income tax return. The IRA contribution limit for 2016 is $5,500 per person, or $6,500 if you’re 50 years of age or over.

If neither of these scenarios applies to you, you may still have tax-saving options. For example, if you or your spouse doesn’t work, IRA contributions made by the non-working spouse could be fully deductible if your household’s MAGI is $184,000 or less.

Keep in mind that even if you don’t meet these criteria, you can still contribute to an IRA — your contributions just won’t be deductible. The good news is that these after-tax contributions could help offset some of the taxes you could owe after you retire.

Meanwhile, if you own a small business, you may have additional retirement- and tax-saving options. In particular, you may be able to establish and fund a Simplified Employee Pension (SEP) plan. The annual SEP contribution limit is much higher than the annual IRA contribution limit: 25 percent of your net income, or $53,000 for tax year 2016. You can still make a tax-deductible 2016 SEP contribution all the way up until next Tuesday.

Healthy Tax Moves

In addition to funding an IRA or SEP, you could also possibly save taxes by contributing to a Health Savings Account (HSA) before April 18. HSAs offer several key tax benefits:

• Your contributions are tax-deductible,
• Funds in the account grow tax-free over time, and
• Money withdrawn for qualified medical expenses is tax-free.

To establish an HSA, you must participate in a High Deductible Health Plan (HDHP). Your family can then contribute up to $6,750 to your HSA for tax year 2016, or up to $7,750 if you are 55 years of age or over. Again, you can make 2016 HSA contributions all the way up to next Tuesday.

Tax benefits aside, we believe HSAs can be a great way to save for out-of-pocket healthcare expenses. There are no annual withdrawal requirements, so funds can accumulate over time, and you can invest your money in the market to try to achieve growth. This can make HSAs an effective tool for saving money now to help meet healthcare expenses later in retirement.

Act Fast!

You’ll have to act fast to take advantage of this year’s IRS reprieve. In order to count for tax year 2016, your IRA, SEP and HSA contributions must be made by April 18, 2017. Please contact us if you have any questions about these or other tax-saving strategies.