3 Ways to Reduce Your Taxes by Tax Day

This year the 2022 tax filing deadline is April 18th and it is approaching quickly, but there is still time to take action that might reduce your tax liability. Here are three ideas to consider:

1) Max out your HSA

A health savings account (HSA) is used to pay for qualifying medical expenses. Maxing out an HSA is one of the easiest, but often overlooked, ways to reduce your taxes. HSAs have a triple tax benefit: 1) contributions are tax deductible, 2) earnings grow tax deferred, 3) distributions at any age are tax free – if used to pay for qualifying medical expenses.

To be eligible to contribute to an HSA, you must be covered by a high deductible health plan (HDHP). Is your health plan a HDHP?  Find out here.

The HSA contribution limit for 2022 is $3,650 for self-coverage, and $7,300 for family coverage. If you are age 55 or older, an additional $1,000 catch-up contribution is permitted.

If your employer contributes to your HSA on your behalf, then it is important to remember the contribution limit above is a combination of your contributions, as well as your employer’s contributions to your account. The employer contribution amount is reported on your W2, box 12, code W. Reference the limits above, check your employer’s contribution from your W2, and the net amount is the additional amount you can contribute by April 18^th.

HSAs are not a “use it or lose it” account like FSAs (flexible spending account). An HSA is yours forever. Additionally, once you turn 65 (when you become eligible for Medicare) you can use your HSA for any reason and avoid the 20% penalty. However, you will owe income tax on the distribution if it is used for non-health related expenses. Essentially, once you are 65 or older, non-health expense related distributions from your HSA are taxed the same as your pre-tax retirement accounts.

You can open an HSA at most banks, or through an HSA administrator like Health Equity, Optum, Fidelity, etc.

2) Contribute to your SEP

A simplified employee pension (SEP IRA) is a type of business retirement savings account often used by self-employed individuals.

A self-employed individual can contribute up to 25% of net self-employment income to a SEP. The max contribution for 2022 is $61,000.

Two points of caution with a SEP:

• Unlike a 401(k), Roth, IRA, etc., SEPs do not allow age 50+ catch-up contributions. Technically, SEPs are funded with employer contributions only. There are no employee deferrals to a SEP, so the catch-up provision is not allowed.
• If you contribute to an SEP and have employees eligible to participate in the plan, then you are on the hook to contribute the same percentage to their SEP that you put into your own SEP. For example, if you contribute the maximum 25% of your net self-employment income to your SEP, then you must also contribute 25% of your eligible employees’ compensation to their SEPs as well. In this example, if your total employee payroll expense is $100,000, then you would be responsible to make a $25,000 contribution to your employees’ accounts.

3) Contribute to your IRAs

Traditional individual retirement account (IRA) contributions can be considered pre-tax and may reduce your taxable income. With the passage of the SECURE Act, there is no longer an age limit on IRA contributions. Therefore, anyone with earned income can contribute to an IRA. Whether or not you can deduct the contribution is determined by your personal situation.

Determine your eligibility for an IRA deduction:

You are covered by a retirement plan at work

You are NOT covered by a retirement plan at work

If you are ineligible for a deduction on your IRA contribution, or if you prefer to pay the taxes now, consider contributing to a Roth IRA. Roth IRA contributions are made with “after-tax” dollars and will not reduce your current tax liability. However, ALL distributions after age 59 ½ are tax free. Check to see if you are eligible to contribute directly to a Roth here.

The 2022 maximum IRA contribution is $6,000 per person ($7,000 if 50 or older at any point in 2022). Remember, this is per person. So, a married couple could each contribute these amounts.

All accounts listed above can be established and funded up to the 2022 tax filing deadline – April 18th, 2023. However, if you make a contribution in 2023 for 2022 purposes, be sure your custodian records your contribution as a 2022 contribution.

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Source: www.irs.gov