This article has been updated for the 2023 tax year filing. The tax deadline is fast approaching, but there are still a few tools left in the tax toolkit that can be used to lower your tax obligation, even at this late stage. To be eligible for the vast majority of tax deductions and credits, you typically have to take an action within the calendar year that you are filing your return for in order to claim them.
However, there are 3 big notable deductions and credits that I am aware of that are exceptions to that general rule. These 3 credits and deductions give you an opportunity to hack your tax obligation at the very last second before you file your return.
In what scenarios could this be an attractive proposition? 3 immediately come to mind:
- You have a higher marginal tax rate (e.g. income that falls within the 24%+ tax bracket) and want to lower the total income and taxes paid on income in at that higher rate.
- You you have additional funds available to invest in retirement.
- You underpaid your taxes over the course of the year and want to avoid an underpayment penalty.
What are those 3 last minute tax deductions and credits you could take advantage of?
1. Contributing to an IRA or Solo 401K
The IRA contribution deadline for a calendar year goes beyond the calendar year, all the way up to the tax deadline (usually April 15), giving you roughly an extra 3.5 months to contribute. Many find this surprising, because 401Ks and other employer-sponsored plans only allow employee contributions for the tax year during the same calendar year.
Traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, and Solo 401Ks are all eligible for contributions for the prior year up through the tax deadline. But, keep in mind that Roth IRA contributions are not tax deductible, so they won’t help if you’re looking for a last-minute tax deduction.
Additionally, you should be aware of the following:
- Traditional and Roth IRAs: have inflation-adjusted contribution limits and an additional catch-up contribution for those aged 50 and over. Not everyone is eligible to deduct Traditional IRA contributions or make direct Roth IRA contributions – there are IRA income limits that change annually that you need to be aware of if you and/or your spouse also have an employer-sponsored plan such, as a 401K.
- SEP IRAs: have maximum contributions that are up to 20% of your net self-employment income. You should look into whether you should make SEP contributions as an employer or individual. SEP IRAs have the same standard IRA contribution deadline as Traditional and Roth IRAs: the tax deadline for that calendar year (typically April 15). Extensions are possible for SEP IRAs.
- Solo 401Ks: “Employee” contributions have the same end of calendar year deadline as other 401Ks (December 31 each year). Non-corporation “employer” contributions: are generally due by the tax deadline for the previous calendar year (typically April 15 in the subsequent year). Extensions are possible.
- SIMPLE IRAs: the latest date for depositing “employee” salary reduction contributions for a calendar year is 30 days after the end of the year (January 30th). Matching employer contributions are generally due by the tax deadline for that calendar year (typically April 15). Extensions are possible. If a contribution comes between January 1st and the tax deadline
2. Claiming the Retirement Savings Contribution Credit
Your IRA contribution could even be eligible for the Retirement Savings Contribution Credit (aka Saver’s Credit), which is a government funded tax credit that matches a percentage of your retirement contribution, up to 50% (total of $1,000 maximum).
Where the “last minute” comes in on this one is if it is made in coordination with a last minute IRA contribution.
A few things to note:
- As a credit, it is a dollar-for-dollar subtraction on taxes you owe, which makes it more valuable than a deduction.
- The Retirement Savings Contribution Credit is non-refundable, meaning it can only be subtracted from the taxes you owe, but it won’t provide you with a tax refund.
- If you are a full-time student for 5 months out of the calendar year, you are not eligible for the credit.
- The are maximum income levels and phaseouts to be aware of.
3. Contributing to an HSA
I didn’t realize this until just a few years ago, but as with IRAs, the HSA contribution deadline is also at the tax deadline.
This is made possible by the fact that, contrary to popular belief, you can contribute to an HSA outside of an employer’s payroll deductions (which end at the end of the calendar year).
HSAs are up there in my list of the best retirement accounts (and here are my picks for the best HSA accounts), due to their amazing tax benefits – contributions are tax-deductible AND qualified withdrawals are tax-free. You can also transfer funds from an existing employer’s HSA (if it’s bad) to your own, at any time.
A few things to note:
- There are maximum HSA contribution limits to adhere to.
- You must meet HDHP requirements for the full year to contribute the maximum contribution. Otherwise, your maximum contribution is prorated by month, and you’re eligible for a month if you had the HDHP on the first day of that month. There is an exception to this called the “last month rule” that you may want to look into.
- HSA (as well as IRA) contributions are “above the line”, which means that you can claim a tax deduction for them even if you do not itemize your taxes.