The clock is still ticking on strategies that can save clients on their taxes this year.
For example, a traditional IRA deduction for 2021 can be funded by this April 18 for the tax deduction. With a filing extension, an eligible retirement contribution to a 401(k) or Simplified Employee Pension (SEP) IRA can be made as late as mid-October.
“Certain retirement accounts must have been set up by Dec. 31, 2021, to be eligible, and of course there are income requirements that must be met that determine contribution amounts,” said Chris Murray, San Francisco-based practice leader in tax services at Aspiriant.
SEPs, Keough plans and defined benefits plans may be established and contributions made up to the due date for filling a return or the extended due date, added Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York.
Pandemic relief opened another possible, lesser-known tax break regarding IRAs. “In 2020, many people took advantage of the Coronavirus Related Distributions (CRD), which meant you can take $100,000 from a retirement plan with no early distribution penalty and pay the tax over three years,” said Lawrence Pon, a CPA in Redwood City, Calif. “If you pay back those distributions within three years, the distribution is not taxable.”
“A taxpayer who took a Covid-related distribution in 2020 could reduce their 2021 taxes by repaying the 2020 distribution and one-third recognition for 2021 and 2022 would be eliminated,” Murray said. “There would also be an opportunity to amend the 2020 return and claim a refund for taxes paid on that first one-third portion.”
Retirement isn’t the only source of accounts that can lower last year’s taxes.
“If you have a health savings account (HSA) that hasn’t been fully funded, it can be topped off by April 18,” Pon said. “The maximum contribution for singles is $3,650 and $7,200 for families. There’s an extra $1,000 contribution limit for those over age 55.”
“Contributions to HSAs reduce taxable income and are deductible,” FitzPatrick said. “Earnings grow tax-free inside the HSA account and distributions aren’t taxed when used for qualified medical expenses.”
Pon added that “a small segment of people” might also qualify for the Super HSA. “If you have a family HSA which would qualify you for the $7,200 contribution limit and have a non-dependent child on your health plan, that child can also set up an HSA that is subject to the family limit, not the individual limit,” he said.