The deadline for filing your taxes may be approaching, but there’s still time for investors to get their tax affairs in order. While filers with investments had to get most of their tax situation in order before the previous calendar year ended, even now they still have areas to pay special attention to and ways to save.
Here are seven top tax tips that even last-minute filers can still benefit from.
1. Contribute to an IRA
Contributing to a traditional IRA is one of the last and best ways many working Americans can reduce their taxes after the calendar year ends. Even if you earn too much for a tax benefit on a traditional IRA, you still have the option of a Roth IRA, even if it is a backdoor Roth IRA. You have until tax day to make your contribution and take advantage of this route.
“Maximizing your investments in your traditional or Roth IRA is a great way to save money in the long run,” says Eric Bronnenkant, head of tax at Betterment.
A traditional IRA allows you to contribute with pre-tax income, meaning you don’t pay taxes on your contributions. The money can be deferred for years, and only when you take it out in retirement will you owe taxes. A Roth IRA uses after-tax income – meaning there’s no tax benefit today – but you’ll enjoy tax-free growth of your money and tax-free withdrawals in retirement.
The maximum contribution in 2023 for an IRA is $6,500 for those under age 50. Those who are 50 years or older can make an additional $1,000 catch-up contribution. The contribution limit is $7,000 in 2024.
However, IRAs have income limits, so it’s important to be aware of them. If you earn too much to take the tax deduction from a traditional IRA, you may still be able to receive an attractive tax benefit from a Roth IRA. If you make too much for even the Roth IRA, you’ll have to turn to the Roth IRA backdoor, which allows employees to convert an account, but not without some hurdles.
Here are the best brokers for Roth IRAs.
2. Add to your self-employed retirement account
If you own your own business, even a sole proprietorship, you can get tax benefits if you contribute to a standalone retirement plan, such as a solo 401(k) or SEP IRA. Both have significant contribution limits that can help you reduce your tax bill today.
The solo 401(k) works like a regular 401(k), but for sole proprietors. It comes in two varieties: a traditional version with tax-deductible contributions with deferred growth, and a Roth version that lets you grow your money tax-free and withdraw it tax-free in retirement. You can contribute to both a solo 401(k) and a regular IRA, giving you additional tax benefits.
The SEP IRA is a plan for individuals and small businesses and functions similarly to a traditional IRA, but with much higher maximum contributions. Contributing to a SEP IRA also doesn’t limit your ability to contribute to a regular IRA, meaning you can get tax benefits from both.
The solo 401(k) and SEP IRA have contribution limits and you should follow the rules closely. Here are the differences between the solo 401(k) and the SEP IRA and which might be better.
3. Get the most out of that HSA
It’s easy to forget that a health savings account (HSA) will give you a tax deduction, but it can. And you’re still building a fund that you can use for medical expenses later. However, this option is only available to those covered by a high-deductible health plan.
“The HSA has a triple tax advantage because contributions are pre-tax, earnings are tax-deferred, and withdrawals for qualified medical expenses are tax-free,” says Bronnenkant.
You have until the tax deadline to contribute, and the 2023 HSA contribution limit is $3,850 for an individual and $7,750 for a family. Each spouse over age 55 adds an additional $1,000 to the contribution limit, meaning a family with two spouses over age 55 can contribute a maximum of $9,750.
That’s a serious tax savings if you can afford to put that much money away. Additionally, your HSA can be used as a supplemental retirement plan because withdrawals can be used for any reason after you reach age 65. However, you will pay taxes on withdrawals used for non-medical expenses.
4. Claim capital losses, but don’t be fooled by wash sales
If you report stock sales or even your home sale, make sure you claim any losses on your return. Capital losses can offset capital gains, ultimately lowering your tax bill. You can even claim a net loss of up to $3,000 on your return, so make sure you report any losses.
However, while doing this, don’t trip over the wash sale rule. A wash sale occurs when you sell an asset at a loss but purchased the same asset within 30 days before or after the sale. Wash sales are expressly excluded from claiming your return.
If you try to claim a wash sale, the IRS will politely recalculate your return and bill you, if necessary.
However, the loss resulting from a wash sale is not gone forever. Once you finally sell the asset and don’t buy it back for 30 days, you can claim the loss and get your tax break.
5. Declare your cryptocurrency profits and losses
If you invest in cryptocurrency, you must not only declare that you sold or received it in 2023, but you must also report any realized gains, that is, profits from the sale of a position. But given the volatility in cryptocurrency, investors can suffer losses, so make sure you claim those too.
You are exposed to any taxable profits from crypto trading even if you have not received a Form 1099 from your exchange. And while you’re at it, make sure you claim your losses and get every tax break you’re legally entitled to. Here’s how to correctly report your gains and losses on your tax return.
Finally, don’t forget that if you spent cryptocurrency, you may also incur a profit or loss. And according to the law, you could create a tax debt or benefit from it.
6. Beware of K-1 forms
If you invested in a partnership or a publicly traded partnership, you should receive a K-1 form that describes your tax situation, including whether you received payouts from the company.
The K-1 form can be easy to miss because it is not a 1099 and unfortunately is often issued late in tax season. Sometimes it can even show up after tax deadline. This means that if you have already filed a tax return, you must file an amended tax return. This isn’t particularly difficult, especially if you use tax software, but it can be annoying.
7. Start planning your 2024 taxes
Did you miss the year-end deadline for selling your losing investments and claiming a tax write-off? That’s one of the biggest ways investors can reduce their taxable income, and if you don’t sell during the 2024 calendar year, you won’t be able to claim them on taxes in 2025.
So take this opportunity to evaluate whether you should pay off some losing investments now to lower your taxes later. Although many investors wait until the last month of the year to sell a loser, there is no legal or tax reason why you should do so. Plus, you might be able to avoid the inevitable struggle at the end of the year when your life is already too hectic.
In short
Once the calendar year is over, investors have limited options to actually reduce their taxes. However, they do have options to ensure they claim every deduction they are entitled to. Additionally, completing your tax form correctly and completely will prevent the IRS from reviewing your return more closely than it already does.
