4 Last Minute Tax Tips to Help You Save

Reducing your tax liability and saving more are noble goals and are both still possible.  The key to achieving this double bonus during tax season is to take advantage of annual opportunities before it’s too late.

money jar_smaller[Please note: all contribution and limit numbers that follow are specific to 2014. If you would like updated numbers for 2015 contributions and limits, please visit www.irs.gov]

1. Fund a current or new traditional individual retirement account (IRA)

The quickest and easiest way to lower your taxes and increase your savings is to make a Traditional IRA contribution.  If you already have one, contributing is easy and can be done in a matter of minutes.  If you don’t have an existing IRA and you haven’t yet filed your 2014 return, it’s not too late to get started and meet the 2014 deadline.  IRA contributions can be made up to the time you file your return or no later than April 15th.

Contribution limits and deductibility vary based on income and filing status.  Below is quick reference to contribution amounts and filing status variations.

Contribution Limits
  • $5,500 (maximum for individuals under 50)
  • $5,500 plus $1,000 (catch up) contribution limit for individuals 50 and over
Filing Status Deductibility
  • Single – contributions are fully deductible if adjusted gross income (AGI) is less than $60,000. Deductibility is reduced incrementally as AGI increases between $60,000 and $70,000 and is phased out completely when AGI exceeds $70,000.
  • Married filing jointly – fully deductible if adjusted gross income (AGI) is less than $96,000. Reduced incrementally as AGI increases between $96,000 and $116,000 and phased out completely when AGI exceeds $116,000.
  • Married filing separately – no contribution is fully deductible. Reduced incrementally as AGI increases between $0 and $10,000 and phased out completely when AGI exceeds $10,000.

2. The little known and less often used spousal IRA

A spousal IRA is another great way to save and to allow a non-working spouse, or one earning very little, to benefit from the tax-deferred growth of an IRA.  Contributions can be made to either a traditional or Roth IRA.  If you choose the latter, bear in mind that contributions are not deductible but distributions are tax free.

Contribution limits are the same as traditional and Roth IRA accounts.  The maximum allowable amount is $5,500 plus an additional $1,000 for individuals 50 and older.  If you are married and file a joint return, total contributions for both the working and non-working spouse cannot exceed $11,000 in 2014 and 2015 if you are thinking ahead.  A key point to remember is the working spouse must have sufficient earned income to fund both IRAs.

Contributions to a spousal IRA are fully deductible if the working spouse does not have an employer-sponsored plan.  If the working spouse does have an employer-sponsored plan, contributions may not be fully deductible.  When the working spouse has an employer-sponsored plan, contributions are fully deductible as long as AGI is below $181,000.  Deductibility of a spousal contribution is reduced as AGI increases between $181,000 and $191,000 and is eliminated completely when AGI exceeds $191,000.

3. The simplified employee pension (SEP) IRA

Designed primarily for the self-employed individual, sole proprietor and independent contractor, a SEP-IRA provides the benefits of a company-sponsored retirement plan.  What it lacks is the complexity that comes with the administrative expense and government reporting requirements of the more commonly known 401(k) plan.

The allowable annual contribution to a SEP IRA is limited to an overall percentage of income for the self-employed. Because this calculation requires a complicated formula for determining allowable contributions, including a multitude of other factors, it would be wise to engage a tax professional to ensure contribution and deduction amounts are computed correctly.  You will be glad you did.

4. Contribute to a Health Savings Account (HSA)

The Health Savings Account, or HSA, has become more common and well known over the past 3-5 years as the responsibility of paying healthcare costs has shifted from the employer to individuals and families.  For readers less familiar with the account, the HSA is established in conjunction with a high deductible health plan (HDHP).  Individuals open the account with a financial institution that specializes in administering the HSA.  The owner makes periodic deposits (not to exceed IRS limits) and uses the money to cover qualified healthcare costs not covered by the HDHP.  Deposits up to IRS limits are deductible.  Money in the HSA can be invested (options are typically limited) and grows tax free.  Distributions (payments for healthcare) are not taxed either as long as they are considered qualified[1].

While amounts can be higher, the HDHP must have a minimum deductible of $1,250 for an individual or $2,500 for a family.  The policy must carry maximum out-of-pocket amounts of $6,350 for individuals and $12,700 for a family.  For 2014, the maximum deductible contribution amount is $3,300 for individuals and $6,550 families.  Like IRA accounts, an additional $1,000 can be contributed by individuals (and families) 50 or older.  HSA contributions must be made prior to filing your tax return and no later than April 15th 2015.

As the 2014 tax deadline nears consider some of these options.  It may seem too late to take advantage of these tax savers but for many filers there is still time.  Financial institutions specializing in these accounts are very familiar with the mechanics and expect last minute requests to open and fund the accounts.  If you have already filed your tax returns and feel you may qualify for one or more of the strategies, check with a financial professional.  He or she can assess your situation and recommend the best course of action for the remainder of 2015.

[1] Go to www.IRS.gov, Publication 969, for further information on qualified medical expenses.