When tax time rolls around, one of the most asked questions we get is: "What can I do to pay less in taxes?" At the time of actual tax filing, there's little you can do to go back in time to make changes to lower your tax bill. However, the IRS does allow a taxpayer to contribute to a couple of accounts that can give a pretty substantial deduction, if contributions are made by the filing date (usually April 15th) of the new year.
IRAs and HSAs
The two main accounts that a taxpayer is allowed to contribute to after the tax year is over (but at or before the tax filing deadline) are an HSA (Health Savings Account) and a Traditional IRA (Individual Retirement Account). A Roth IRA contribution is also allowed, however there is no tax deduction for this account since it is after tax dollars that are contributed into a Roth.
However, there is a tax credit that can be received for a Roth contribution, known as the "Saver's Credit." This is allowed for taxpayers with a lower income threshold. The max contribution the credit is based on is $2,000 for a single filer, or $4,000 for married filing joint. This chart gives a breakdown of the credit based on a tax payer's filing status and AGI (adjusted gross income.)
2020 Saver's Credit chart
Being that the median household income in the United States in 2019 was $68,703 according to the United States Census Bureau, the median taxpayer would not be eligible for this credit. But if you fall below the income thresholds above, the credit is allowed for both Roth and Traditional IRAs, a Simple IRA, 401(k), 457, and 403(b) contributions. Except for the Roth IRA which has its own appeal, this credit is in addition to the tax savings (via a tax deduction, see below) of the contributions being made, or with pre-tax contributions made through an employer-sponsored plan.
Tax savings with the Traditional IRA
Since contributions to a Traditional IRA are generally made with after tax dollars, the taxpayer gets credited for this amount on their tax return. This type of account is a great asset to utilize for retirement savings, but it can also provide a substantial amount in tax savings every year. Of course, there are some stipulations like always with IRS regulations, and each year they are subject to change. But the following chart gives a few examples of the amount a taxpayer could save by maxing out their contribution to a Traditional IRA.
There are many other factors that end up affecting your final tax bill. But as a simple example, you can see the benefits of being a saver. Especially notice the significant jump in the amount saved between the two married filing joint scenarios. The difference here is an example of how an IRA contribution could drop the taxpayers into a lower tax bracket. This could be a difference of as much as 10% on taxable income, based on the married filing joint tax brackets for 2020 of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Consider becoming an IRA saver
It is always a good idea to check out the tax savings a retirement contribution could make. It costs nothing to check and the contribution doesn't have to be made until the tax filing deadline. Making good informed decisions can really pay off over the long-term. If you want assistance in preparing your tax return or setting up an IRA, feel free to get in touch.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.