As the federal tax deadline approaches, individuals still have a window of opportunity to either reduce their tax bill or increase their refund. Although the end of the year typically marks the close of most tax-planning strategies, there are a few options available before the April 15 deadline that could potentially save you money, according to experts.
One of the first strategies to consider is making a pretax contribution to an individual retirement account (IRA). According to Mark Steber, Chief Tax Information Officer at Jackson Hewitt, this option remains a popular choice for many individuals seeking to lower their taxable income. By making a deposit before the 2023 tax deadline, you could potentially reduce your adjusted gross income, especially if you participate in a workplace retirement plan.
For the tax year 2023, the maximum contribution limit for an IRA stands at $6,500, with an additional catch-up contribution of $1,000 for investors aged 50 and older. The immediate deduction available for qualifying contributions can offer significant savings, regardless of whether you itemize tax breaks on your return.
Considering Roth IRA Contributions
In addition to traditional IRAs, Roth IRAs present an alternative option for individuals, particularly those in the 10% or 12% tax brackets. While Roth IRA contributions do not provide an initial tax break, the advantage lies in tax-free growth over time. Tommy Lucas, a Certified Financial Planner, recommends this approach for individuals falling within the lower tax brackets.
Moreover, married couples filing jointly can take advantage of a spousal IRA, which allows nonworking spouses to open a separate IRA account. This underutilized option lets couples contribute up to the limit for each IRA, provided the working spouse earns enough income to cover both contributions.
Another last-minute tax-saving opportunity to consider is contributing to a health savings account (HSA) by the tax deadline. With a high-deductible health insurance plan in place, individuals can benefit from the triple tax advantage HSAs offer: an upfront deduction for contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Investors aged 55 and older can save an additional $1,000 with an HSA contribution, making it a valuable tool in managing healthcare costs while reducing taxable income. Before making any contributions, it is essential to carefully assess your short- and long-term financial situation to determine the most advantageous strategy.
While the tax year may be coming to a close, there are still opportunities to optimize your tax savings before the federal deadline. By exploring options such as IRA contributions and HSAs, individuals can potentially lower their tax liability and secure financial benefits for the future.
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