As you figure your taxes this year, you might be looking at the result and thinking that it would be nice if you could deduct just a little bit more from your income. Even though a tax deduction isn’t as valuable as a tax credit, it can still help you by lowering your tax liability and reducing what you owe overall.
Plus, if you are worried about finding yourself in the next tax bracket up, another deduction or two can really help. But it’s too late — the year has ended. Any deductions you take go toward your next tax return, right?
The good news is that you still have a way to make a deduction for the previous year. Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs) allow you to make tax-deductible contributions up until tax day, so you have a chance to boost your deductions if it looks like it will help your cause.
Previous Year Deductions
A traditional IRA (contributions to a Roth IRA aren’t tax-deductible) allows you the option to make a “previous year contribution.” The HSA has this option as well. As long as you make your contribution before tax day, and as long as you remember to check the proper box in your paperwork or online, you can use the contribution to lower last year’s income for tax purposes.
You do have to realize, though, that once that money is earmarked for use in reducing last year’s income, it can’t be used on next year’s tax return to reduce this year’s income. Each contribution can only be used for one tax year.
Opening a New Account
If you don’t have a traditional IRA or a HSA to make contributions, you can open one and deduct the amount that you fund the account with. There are eligibility requirements, though. Plus, there are limits to the amount of money you can contribute to each account. Check to make sure you meet the requirements, and that you aren’t trying to contribute too much to the account. If you are in a position to do so, it might be worth it to max out your contribution amount for both the IRA and the HSA for the previous year.
Opening a new account can provide you with benefits beyond the tax deduction. It’s important that you consider these benefits, since the tax benefit you receive will not be equal — in dollar amounts — to what you contribute to these accounts.
Your IRA will help you save up, tax-deferred, for the future, helping you create a nest egg. A HSA can help you save up money for health care expenses. In the future, you can set money aside in the HSA, receive your tax deduction, and then use the money in the account (many accounts come with a debit card) to cover your out of pocket expenses. It’s a great way to make more of your medical costs tax-deductible.
Figure out whether or not you could benefit from another tax deduction. Run the numbers in both scenarios, and find out whether or not it will work for you.
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