I wanted to share a new noteworthy follow-up to the IRS’s 2021 federal tax filing deadline extension to May 17. The IRS has now officially announced that the HSA contribution deadline, the IRA contribution deadlines (both Traditional and Roth), and the deadlines for a few other tax-advantaged accounts (Archer MSAs and Coverdell ESAs) have been moved to the same new extended tax deadline for the 2020 year: May 17, 2021. As a result, you now have an extra month to make contributions for the 2020 year. And, there could be extra incentive to do so this year involving stimulus payments, which I will cover below. The IRS also reiterated that estimated tax payments for Q1 of 2021 are still due on April 15, so no extension there.
There had been some debate on whether the IRA and HSA deadline extension would be made, with many incorrectly stating that the extension was automatic and others more cautiously suggesting that filers should stick to the original tax deadline. Historically, the IRA, HSA, Coverdell, and Archer deadline has fallen on the same day as the tax deadline. When the tax deadline was moved to July last year, as a Covid relief measure, the contribution deadlines for these accounts were moved to the same date. Now, the same has happened this year. Important side note: many state tax deadlines have also been extended this year to match the federal tax deadline – but not every state. And a few states even extended their deadlines beyond May 17.
The Tax Benefits of IRA and HSA Contributions
I’ve always liked the fact that you can make contributions to IRAs and HSAs for the prior year up until the tax deadline. It gives you an extra few months to contribute and an opportunity to see what your adjusted gross income is and lower your tax obligation (or increase your refund) while you are completing your taxes.
If you have the cash flow to do so, contributing to an HSA or Traditional IRA is a great habit to start, as contributions result in a dollar-for-dollar tax deduction (up to the maximum IRA contribution for those under IRA income limit levels and maximum HSA contribution levels). HSAs also have extensive tax-free properties for qualified medical expenses, giving them the most tax benefits of any tax-advantaged account and are one of the best type of retirement accounts to contribute to, as a result.
American Rescue Plan Payments and AGI Reduction with IRA & HSA Contributions
With the American Rescue Plan Act stimulus/relief payments, there could be an additional incentive to make a Traditional IRA or HSA contribution this year. Eligible stimulus payment recipients will receive up to $1,400 per individual (including dependents) for those with adjusted gross income at the following levels:
- “Individual” tax filers earning up to a $75,000, “Married Filing Jointly” earning up to $150,000, and “Head of Household” earning up to $112,500 in either 2019 or 2020 adjusted gross income will each receive the full amount per person, and an additional $1,400 per dependent. An eligible family of 5 would receive $7,000, for example.
- Payments to individuals with an AGI above those levels will be reduced and phased out entirely at $80,000 for Individuals, $160,000 for Married Filing Jointly, and $120,000 for Head of Household.
- Adult dependents – including college students, disabled adults, and elderly being cared for – may qualify for the $1,400 dependent payment, which is a change from previous payments.
Since contributing to a Traditional IRA or HSA results in a dollar-for-dollar reduction of adjusted gross income, there could be a significant windfall for those currently above the income relief payment thresholds who can push their incomes below with IRA and/or HSA contributions. Note: Roth IRAs, specifically, are tax-free when withdrawn at retirement age (post-tax), but do not have a similar dollar-for-dollar tax deduction and AGI reduction in the year of contribution.
If you haven’t yet started filing your taxes, I previously put together a list of my picks for the best tax prep software and best and cheapest ways to E-file for suggestions on where to file your tax returns. You can also check out my guide on the basics of how to do your taxes for an overview of most of what you will need to know for filing taxes this year.