last minute tax deductions

Really Last Minute Deductions: IRA and HSA


by

3 April,2013

The last year is over and we’re well into tax season.

However, if you’re still looking for a few deductions, it’s possible for you to benefit from some really last minute tax breaks. You can still make previous year contributions to your IRA and/or HSA.

Contribute for the Previous Year Until April 15

You have until April 15 to make a previous year contribution to an IRA and/or HSA. I made use of the previous year contribution this year with my HSA. I was $1,000 short of maxing out my HSA contributions for 2012, so I went ahead and made that contribution. It counted as a previous year contribution, and boosted my tax deductions.

It’s also possible to do this with a Traditional IRA (you don’t deduct Roth IRA contributions from your income). If you haven’t maxed out your IRA contribution for the last tax year, you can still do so. However, note that if you choose a previous year contribution, you should make the contribution before you file your taxes. So, even though you technically have until April 15, my accountant says to just make the contribution by the time you file your tax return.

How to Record the Previous Year Contribution

It’s vital that you correctly record your previous year contribution when you make it. If you make your contribution online, you usually have a choice of boxes to check. Be sure to indicate the previous year contribution by checking the correct box.

Realize that you can’t use the same contribution for two different years. Whether you contribute to an HSA or an IRA, you need to make sure that you only claim the money for one year or the other. If you make a previous year contribution, you can’t count that same contribution for this year’s taxes. Carefully consider which year you want your contribution to be in before you make your move.

How It Can Help

In many cases, taking a last minute tax deduction like this can be quite helpful. A tax deduction lowers your income, and that can affect your marginal tax rate, as well as dictate whether or not you are eligible for other tax benefits.

There are some tax credits and tax deductions that are phased out when you reach a certain income level. If you are close to the phase out point, an extra deduction, in the form of a contribution to an HSA or an IRA, can be very helpful. The deduction might be just enough to keep your income below the threshold you are concerned about.

Another way that your last minute contribution to an IRA or an HSA can help is by keeping you in a lower tax bracket. If you are right on the cusp of a new marginal bracket, your contribution can keep you below that bracket. It doesn’t matter a whole lot, since marginal brackets ensure that your income isn’t all taxed at the same rate. It steps it up more gradually as a result. However, to some taxpayers it does matter.

Carefully consider your position, and consider getting help from a trusted tax professional. With the right strategy, you can still contribute to an HSA or IRA for the previous year.