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Last-Minute Tips to Cut Your Tax Bill by Jason Morely, CPA/PFS

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Posted on March 18, 2022 by Jason Morley

Before filing your 2021 individual tax returns, consider if there is anything else you can do to reduce the taxes you owe Uncle Sam. While your annual tax liability is based primarily on the income you earned and the actions you took before December 31, 2021, you may qualify for a last-minute opportunity to cut your tax bill before the April filing deadline.

Contribute to an IRA

For 2021, you have until April 18, 2022, to contribute as much as $6,000 to a traditional IRA ($7,000 if you are age 50 or older) and qualify for a potential deduction that can reduce the amount of your income that is subject to tax. Your eligibility for the tax deduction depends on several factors, including your modified adjusted gross income (AGI) and your and your spouse’s access to an employer-sponsored 401(k) or 403(b) retirement plan.

For example, the deduction for a 2021 contribution to a traditional IRA by an individual covered by a workplace retirement plan phases out when AGI is between $66,000 and $76,000. If you are married filing a joint tax return and the person making the IRA contribution is covered by a workplace retirement plan, the income phase-out range for 2021 is $105,000 to $125,000. If you participated in a workplace retirement plan and earn too much money to receive the benefit of a tax deduction for your IRA contribution in 2021, you still may qualify for a deduction on contributions you make to a spousal IRA, which has higher income limits.

It is important to remember that a deductible IRA contribution reduces your tax bill in the year of contribution. Earnings and interest grow tax-deferred, but withdrawals taken when you reach the full retirement age of 59½ are taxed in full. This is different from a Roth IRA, for which you pay taxes up front in the years of contributions and, in exchange, receive tax-free withdrawals in retirement provided you own the account for at least five years and you are age 59½ or older. The deadline for making 2021 Roth IRA contributions of $6,000 ($7,000 if you are age 50 or older) is also April 18, 2022, but it is subject to its own income limitation rules.

Self-employed taxpayers also have an opportunity to claim as a deduction the lessor of 25 percent of compensation or $58,000 when they set up and contribute to a SEP IRA by May 15 or their business tax-filing deadline (including extensions). Withdrawals taken in retirement are subject to tax. They also have until the April 18, 2021, tax-filing deadline to make a matching employer contribution to their 401(k) plan of as much as 25 percent of compensation, up to a maximum of $58,000 in 2021. Depending on your business structure, those employer contributions may qualify for a tax benefit in the form of deductible business expense.

Contribute to an HSA

If you participated in a high-deductible health plan, defined as one with a 2021 annual deductible of at least $1,400 for self-coverage (or $2,800 for families) and maximum out-of-pocket costs of $7,000 for self-only coverage (or $14,000 for family coverage), you have until April 18, 2022, to establish and contribute pre-tax dollars to a health savings accounts (HSA) that provides triple-tax benefits.

Not only can you write off HSA contributions, but you can also enjoy tax-free growth and avoid taxes completely when you take withdrawals to pay for qualified medical expenses, including out-of-pocket deductibles, health and wellness programs, durable medical equipment and certain over-the-counter medications and personal-care items. Unused balances roll over year-after-year, allowing you to accumulate significant savings that you may invest to grow and pay for increasing health care costs in the future. The maximum contributions you and your employer may make to an HSA for tax year 2021 are $3,600 for individuals ($4,600 for individuals older than age 50) and $7,200 for family coverage ($8,200 for taxpayers over age 50).

About the Author: Jason Morley, CPA/PFS, CFP®, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs where he works in the multi-family office group advising high-net worth individuals on managing and preserving wealth and family values through multiple generations. He can be reached at the CPA firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbpcpa.com.