Trying to make a last-ditch effort to lower your 2016 tax bill before you file? Good news: you still can. Even though the year has ended, here are three ways you can still reduce your 2016 taxable income.
Contribute to an IRA
Contributions to a traditional IRA are an adjustment to income, which lowers your adjusted gross income (AGI) and, in effect, taxable income. The contribution limit is $5,500 per year ($6,500 if you’re 50 or older) and the contribution deadline is the due date of your return, not including extensions (for 2016 filings, that’s April 17, 2017). If you don’t have an IRA, you can still set one up and contribute before April 17. In either case, just make sure you contribute for year 2016, not 2017.
One thing to be aware of, though – if you’re covered by a retirement plan at work, your IRA contribution deduction may be limited. Click here to see if this applies to you.
Contribute to a SEP IRA
If you’re self-employed or run a side business, you can still open up and contribute to a Simplified Employee Pension Individual Retirement Arrangement (SEP IRA). SEP IRA contributions are also an above-the-line deduction which reduces your AGI. The contribution limit for a SEP IRA is the lesser of 25% of your business’s net income less your deductible portion of self-employment tax, or $53,000 (for 2016).
The deadline to set up and contribute to a SEP IRA is the due date of your return including extensions (for 2016 filings, that’s April 17, 2017 and October 16, 2017 if you’re on extension).
If you have employees, be mindful that all employees must receive the same benefits under a SEP plan and must have the option to take advantage of employer contributions to a SEP IRA in their name.
Contribute to your HSA
A Health Savings Account (HSA) is a medical savings account that you can contribute to and withdraw from (tax-free) to pay for certain medical expenses. High Deductible Health Plans (HDHP) are the only plans that can be HSA-eligible, but not all of them are, so double check the specifics of your plan before considering a contribution.
If your employer allows you to contribute to an HSA using pre-tax dollars, those contributions are already reflected in you 2016 W-2. You can still make additional contributions on your own, which would reduce your AGI.
You have until April 17, 2017 to contribute to your HSA for year 2016 if you were covered by an HSA-eligible health insurance plan at work. The 2016 contribution limits are $3,350 for an individual or $6,750 for a family.
If you’re stuck with a higher projected tax bill than you anticipated for 2016, consider contributing to one of the following:
- Traditional IRA
- SEP IRA (if you’re self-employed)
They may not wipe out the tax bill completely, but hey, it’s better than paying the IRS, right?
If you would like more info because you’re considering either of these options or because you’re not sure if they would apply to you, let me know and I’ll be happy to help. Here’s how to reach me:
Phone – (646) 397-9537
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Nick Aiola is a CPA located in New York, NY. Nick provides tax and accounting services to a wide range of clients, including individuals, businesses, and fiduciary entities.