Do you wait until the eleventh hour to file your taxes? While many people file early to receive their tax refund as soon as possible, waiting to file your taxes gives you more time to claim these last minute tax deductions. “The early bird gets the worm” is the old adage, but waiting to file your taxes at the last minute can be more advantageous in this instance because you have until April 17, 2018–the Federal tax filing deadline–to claim these additional deductions.
While most tax deductions like charitable contributions and medical expenses are only for money you spend by 11:59 pm on December 31, that’s not the case with these deductions because they lower your taxable income. If you’ve already started filing your taxes online but didn’t click the “File Now” button because you have to pay into the IRS, these contributions can reduce the amount you have to pay in and maybe even get a refund.
Open a Traditional IRA
Do you contribute to a 401k plan at work? If so, chances are your contributions are made with pre-tax dollars that lower your taxable income this year; although you’ll have to pay taxes on your withdrawal amount when you retire.
While the cutoff date for your 2017 401k contributions was December 31, 2017, you can contribute up to $5,500 to a Traditional IRA to drop your taxable income on a 1:1 basis. If your taxable income is $50,000, a $5,500 contribution lowers your taxable income to $44,500 before any other deductions.
If you’re married and filing jointly, you and your spouse can both contribute up to $5,500 to your respective IRA for a total potential deduction of $11,000.
Even if you don’t own a Traditional IRA, you only have to open and fund one before the federal tax deadline. For your 2017 federal tax return, the filing deadline is April 17, 2018.
Where to Open A Traditional IRA
Any DIY brokerage like Fidelity or Vanguard, personal financial advisor, or almost any robo-advisor that manages your money for you like Betterment or Wealthfront offer Traditional IRAs that will fit the bill. You just have to decide if you want to be a self-directed DIY investor responsible for your own investment decisions or automating your investing with a managed account.
Fund a Health Savings Account (HSA)
Opening a Health Savings Account is another win-win option as you lower your taxable income for this tax filing season and your withdrawals are tax-free if you use them to pay for eligible medical expenses in the future. You won’t be able to contribute as much to an HSA as a traditional IRA, but it’s better than nothing.
Single taxpayers can contribute up to $3,400 and joint taxpayers can contribute up to $6,750 combined. Taxpayers at least 55 years or older can make a $1,000 catch-up contribution.
Besides the contribution restrictions, not everybody qualifies for a HSA plan. You must meet the following requirements:
- You must have a high deductible health plan (HDHP)
- Single taxpayers must have a minimum deductible of $1,300
- Families must have a minimum deductible of $2,600
- Must have enrolled in your HDHP plan on or before December 1, 2017, and keep an HSA-eligible policy for all of 2018
- Cannot be enrolled in Medicare or claimed as a dependent on another tax return
Most families with employer health insurance will qualify for an HSA because of the deductible requirements. If you have insurance through “The Exchange” or you’ve swapped employers recently, you will need to confer with your insurance provider to verify your eligibility.
Save for College with a 529 Plan
A 529 College Savings Plan won’t get you a federal tax deduction or credit, but it can help on your state tax return. Approximately 30 states offer tax deductions or credits on your annual 529 plan contributions. And, your contributions grow tax-free until you use them to help your child pay for college.
Before you make a last minute contribution, check with your state’s 529 plan to see if they allow 529 tax deductions. Some states only count contributions made before December 31, but others extend the filing deadline until your state tax return due date.
Because the 529 plan deductions are so restrictive, focusing your dollars on Traditional IRA and HSA contributions should be your first two priorities.
These Deductions Can Also Help You Avoid a Tax Penalty
Traditional IRA and Health Savings Account contributions are the two guaranteed ways to lower your taxable income but don’t forget these tax deductions that you made during the actual calendar tax year (January 1 to December 31).
- Paid student loan interest
- Home mortgage interest
- Charitable contributions
- State and Local taxes
- Medical expenses exceeding 7.5% of your adjusted gross income
With the tax law changing for 2018 taxes, this might be the last year you can deduct some of these expenses. The requirements to itemize double. And, some deductions are being removed entirely.
Most of your tax deductions must be logged during the actual calendar year. However, you can still contribute to a Traditional IRA or HSA until mid-April to lower your taxable income. That’s if you didn’t max out these contribution limits already. Taking the time to maximize these last minute tax deductions of these accounts can be well worth your time investment.