After two years of extended deadlines, the tax return is back in April – and is fast approaching.
The pandemic led to delays in the application period which lasted until late spring or even summer. But this year, the filing date for most taxpayers is April 18, a little more than a week away.
Nevertheless, there may still be some things you can do to reduce your tax expense. Here are some steps to consider.
There is still time to contribute to a traditional individual pension account for the tax year 2021 and take a deduction – if you qualify. IRA grants for 2021 can be made until the last day of application – up to $ 6,000 for an individual and $ 7,000 for people who were 50 years or older at the end of 2021. However, your deduction may be limited depending on your income and if you have a pension plan in the workplace.
Self-employed people can spend more of their income by contributing to a simplified pension plan for employees, or SEP IRA. The grant limit for a SEP IRA for 2021 is 25 percent of your compensation or $ 58,000 – whichever is lower. (You may also have more time to contribute to a SEP IRA. If you receive an extension until October 15 to file your tax return, you have until then to make a contribution.)
The deadline to contribute to a Roth IRA for 2021 is also April 18 – but since you do not receive a tax deduction for depositing money on a Roth, it will not lower your tax bill.
You may also be able to reduce your taxable income by contributing to a health savings account, or HSA, before the application period. To be eligible, you must be covered by a health plan that meets specific criteria, such as a high deductible (at least $ 1,400 for an individual by 2021), says John Larson, vice president of benefit solutions at Conduent, a business services company.
If you qualify, the 2021 grant limit is $ 3,600 for an individual and $ 7,200 for families. People 55 and older can contribute an extra $ 1,000.
If you had qualified health insurance for only part of 2021, the maximum contribution you can make may be less, says Rita Assaf, vice president of pensions at Fidelity Investments. For example, someone enrolled in a qualifying health plan for six months can contribute up to $ 1,800 – half of the maximum.
But there is an alternative that allows you to contribute more to your HSA, known as the “last month” rule, Assaf said. Here’s how it works: If you are eligible to contribute to an HSA on the first day of the last month of the tax year – let’s say December 1, 2021 – you are considered eligible for the full year and can contribute up to the maximum. But there is a catch: you have to keep your high-deductible health insurance for the next 12 months. If you lose qualifying health protection before the end of 2022, you will be liable to tax and possibly a penalty on the extra allowance, the IRS said.
Money is added to an HSA tax-free. It is also tax-free when it is deducted to pay for eligible medical expenses and can be invested and grown without federal taxes. The accounts come with you if you change employers.
At the state level, a few states do not offer the same tax breaks. California and New Jersey tax HSA contributions, while New Hampshire and Tennessee tax HSA income, including interest income and investment gains, according to an HSA provider, Lively.
And for those of you who have not started calculating your taxes and now realize that you can not meet the tax deadline, you can apply for an automatic extension. This gives you until October 15 to have your return prepared and sent.
“You will want to extend if you do not have the information to prepare for a complete and accurate return,” said Henry Grzes, director of tax practice and ethics at the American Institute of Certified Public Accountants.
But a file extension no longer gives you time to pay. So you need to make your best estimate of what you may owe and pay the state by April 18th.
Some people may worry that they can not pay, so they leave no return. But it creates more problems, including penalties for not reporting, Grzes said. You should submit and pay what you can, he said, and then contact the IRS to discuss an installment plan to pay off any balance after your return has been processed. To estimate what you owe, he said, check last year’s returns or, if you use a do-it-yourself tax program, indicate what information you have available to get an approximate amount.
How can I find a reputable taxpayer?
The Ministry of Justice recently warned taxpayers to be careful when choosing a tax specialist, noting that they have taken action against many dishonest preparers over the past year. Red flags include preparers asking you to sign a blank return or refuses to sign a return that they have prepared (known as a “ghost return”), does not allow you to review your return before submitting it or depositing your refund in a way that is not clear to you. The IRS offers tips for choosing a preparer on its website and offers a directory of legitimate preparers who can be searched by zip code.
Where can I get free help with tax issues?
The Internal Revenue Service is offering free entry assistance – no time required – at its taxpayer assistance centers in many cities on Saturday, April 9th. The office will not prepare tax returns, but taxpayers can get questions answered and get guidance.
Free tax preparation options include the IRS Free File and the Income Tax Assistance and Tax Advice Program for the Elderly. You can search the IRS website for locations.
When is the deadline for the first estimated tax payment in 2022?
If you are self-employed or otherwise have to pay estimated taxes per quarter, the first payment deadline is 18 April. You can use Form 1040-ES to calculate how much you have to pay.