When it comes to tax savings, there are some investment moves that must be completed by December 31 of the tax year, such as tax loss harvesting. Fortunately, there are still several things investors can do between the end of the year and tax day to save on their taxes from the previous year.
Here are four investing steps you can come up with until tax day (April 15) to save on your 2023 taxes.
4 Investments That Can Lower Your Taxes Before Tax Day
1. Contribute to a traditional IRA
One way to get a potential tax benefit is to contribute to a traditional individual retirement account (IRA). These contributions can reduce your taxable income and lower your tax bill if you qualify for the deduction.
Whether or not you can get a tax deduction for traditional IRA contributions depends on your income level. Single filers can get at least a partial deduction if their income is less than $83,000, while married couples filing a joint tax return can get at least a partial deduction if their income is less than $136,000. If you are single or married and neither you nor your spouse are covered by a workplace pension scheme, there are no income restrictions on taking the tax deduction.
Once you contribute to an IRA, the money can be invested and tax deferred until withdrawn during retirement. Using an IRA is a great way to supplement your workplace retirement plan, such as a 401(k).
You can also make Roth IRA contributions until tax day, but these contributions are made with after-tax dollars, meaning you won’t get a current tax deduction. Roth IRA tax benefits come during retirement when withdrawals are tax-free.
2. Spousal IRA Contributions
People often overlook the opportunity to make spousal IRA contributions when one spouse has little or no income. But as long as one spouse has earned income, both spouses can contribute to an IRA, potentially doubling the available tax deduction.
For example, consider a married couple where each spouse is 45 years old and one spouse earns $100,000 at his full-time job and the other spouse earns $5,000 at a part-time job. Each spouse can contribute up to $6,500 to a traditional IRA for 2023, creating a potential tax deduction of $13,000. Married couples age 50 and older can contribute up to $7,500 each for the 2023 tax year.
There are income thresholds for many different types of taxes, so lowering your taxable income through an IRA contribution can save you money in other ways as well. However, the rules can be difficult to understand, so it is best to consult a financial advisor or tax professional.
Here are a few things to keep in mind:
- The couple must have earned income at least equal to the total IRA contribution
- You must file a joint tax return
- If neither person participates in a workplace retirement plan, such as a 401(k), there are no income limits for taking the tax deduction.
- If both spouses are covered by a workplace retirement plan, full or partial deductions are allowed as long as your income is less than $136,000.
- If you do not participate in a workplace retirement plan, but your spouse does, deductibility ends at an income level of $228,000 in 2023. For the spouse who participates, the income threshold is $136,000.
3. Contribute to a health savings account (HSA)
You also have until tax day to make contributions to Health Savings Accounts (HSAs). HSAs offer a triple tax benefit because you can get a current tax deduction for contributions, invest and grow the money tax-free, and withdrawals used for qualified medical expenses are tax-free. The money can be withdrawn during retirement for any reason without penalty, but withdrawals for non-medical expenses are taxed.
Please note that you must be enrolled in an HSA-eligible health care plan to contribute to an HSA. The 2023 contribution limits are $3,850 for individuals and $7,750 for families. Those age 55 and older can contribute an additional $1,000.
These limits are based on employer and employee contributions, so if your employer contributed $1,000, an individual can only contribute $2,850 before hitting the limit (unless they are 55 or older).
4. SEP IRA Contributions
If you’re self-employed, a Simplified Employee Pension (SEP IRA) can be an excellent way to boost your retirement savings. You can contribute before or after taxes, and you can set aside up to 25 percent of your net income or $66,000, whichever is less. The limit increases to $69,000 for the 2024 tax year.
SEP IRAs are particularly useful for small business owners who do not have access to more traditional employer-sponsored plans such as 401(k)s. SEP IRAs have higher contribution limits than traditional or Roth IRAs, making them even more attractive as a retirement savings tool.
Keep in mind that if you have employees, you must also contribute an equal percentage of compensation to their SEP IRAs. Here’s everything you need to know about SEP IRAs.
In short
Even though 2023 has come to an end, there are still steps you can take to save on your taxes as long as you do it before tax day. Consider making IRA contributions for you or your spouse and maximize your HSA contributions if you have a qualifying health plan. Those who are self-employed can take advantage of higher contribution limits by contributing to a SEP IRA before tax day.
