Many taxpayers find that, when they reach the end of the year, they still have an income that is higher than they would like. If it’s past December 31, though, reducing that income through deductions is difficult. You’re usually stuck with the deductions you already have, and the income that you have already reported.
There are two ways to get a truly last minute tax break, though. If you have a Traditional IRA and a Health Savings Account, you can contribute money to these accounts and lower your income, even if the year is over.
April 15 Contribution Deadline
In most cases, you have to contribute money to an account by December 31 of the tax year in order to receive your deduction. The contribution deadline for a Traditional IRA and a Health Savings Account is different; you have until April 15 of the following year. So, if you are filing your taxes for tax year 2013, you have until April 15, 2014 to make your contribution for 2013.
This only works if you have enough room for your contribution. If you have already contributed $3,000 to your Traditional IRA, this means that you can only contribute another $2,500. This is still a decent-sized deduction, and it can lower your income.
The same is true of your HSA. If you haven’t contributed the maximum allowed, you can add money to the account and still receive a deduction, as long as it is added by April 15.
In order for this strategy to work, however, you need to make sure that you designate your contribution as one that is a “previous year” contribution. If you make the contribution electronically, there is usually a checkbox that allows you to note whether this is a current year contribution, a rollover, or a previous year contribution. Make sure that you mark the right box so that you aren’t penalized for over-contributing in one of your tax years.
Also, realize that you can’t claim the same contribution in two different tax years. You can get help coordinating your tax deductible contributions from a tax professional who can help you with your planning.
This strategy is most effective for those who are on the edge of a tax bracket. If you can use this contribution to lower your income and keep in a lower tax bracket, or if you can use to stay qualified for deductions and credits that come with phaseouts, it’s possible to reduce your tax bill significantly, allowing you to keep more of your money, and putting it to work for you.