Tax Day this year is April 18, 2022, for filing your federal and Minnesota state tax returns. Although your ability to reduce your 2021 taxes became more limited after year-end, there are a few last-minute deductions that could possibly lower your adjusted gross income (AGI). (As always, it makes sense to consult with your tax professional or advisor before making any decisions.)
Top off your individual retirement account
You still have time to stash money into your IRA for a 2021 deduction. You can contribute up to $6,000 ($7,000 if you’re 50 or older), provided you had earned income last year. Whether you can deduct your IRA contribution, however, is more complicated. Your ability to write off your IRA payment depends on whether you participate in a workplace retirement plan, such as a 401(k) or 403(b). Deductibility will also depend on your elective deferrals, company matches, profit sharing contributions and other employer benefits — as well as your income level. Phaseouts for deductions kick in as your earnings increase. (You can get more details at IRS.gov.)
If you can transcend these limitations, adding to your IRA may be beneficial, particular if your income is modest and you expect to have a balance due on your federal return.
Covered by a workplace plan, but your spouse isn’t? Contribute to a spousal IRA
If you’re participating in a workplace retirement plan but make too much to qualify for a traditional IRA deduction, you still may have an available deduction. If your spouse isn’t participating in a workplace retirement plan and you file your taxes jointly, you may qualify for a write-off for spousal IRA contributions. (A spousal IRA is simply a traditional or Roth IRA that’s opened in the non-working spouse’s name into which both partners can make contributions.)
If you are married and file jointly, you and your spouse would be able to contribute a combined maximum of $12,000 or $14,000 for 2021, assuming the working spouse made that much or more from earnings last year. Keep in mind that if the working spouse stopped working at some point last year, and already had an IRA, there’s no need to open a separate spousal IRA. Contributions can be made into your current IRA.
Heath Savings Accounts may be attractive
There’s also plenty of time to make health savings account (HSA) contributions for 2021, if you have an eligible high-deductible health insurance plan. Long-time readers know that we’re big fans of HSAs, which allow you to save for future medical costs tax free, take out money tax free for qualified medical costs, and take penalty-free distributions for any purpose after age 65. And, because HSA contributions avoid FICA taxes, they can have a big impact on your reducing your taxes.
Individual HSA contributions are capped at $3,600 for 2021, but family coverage will allow you to write off up to $7,200.
Remember, the tax-diversification benefit from HSAs is directly tied to whether you have a high-deductible plan, which makes sense if you and your family are in good health. Running the numbers from a cost-benefit standpoint is a good idea before you open an HSA. We suggest consulting with a financial advisor before you make the leap.
Don’t neglect your taxable or after-tax accounts
Tax rates are at the very low end historically for most Americans, but they will sunset in 2025. We are advising many of our clients across all tax brackets to brace for potentially higher rates in 2026. For that reason, we think it’s important for investors to maintain adequate tax diversification across available taxable, tax-advantaged and tax-free “buckets.” Depending on your situation, contributing to Roth IRA for 2021 — even if it results in a higher tax bill this year — may work out better for you in the long run.
Taking advantage of these last-minute deductions could help reduce your tax bite this year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
