So it's 2017 and it's been so warm here in New Jersey that the spring flowers have started to come out in my yard. You should have received your W2 form from your employer and you might have your tax return finished or at least you’re thinking about how you’re going to get your tax preparation completed. March Madness is beginning and the Grapefruit League is in full swing down in Florida. So does that mean it's game-over for tax savings in 2016? Absolutely not! There are still moves you can make in the beginning of 2017 to lower your 2016 taxes.
Contribute to Your Traditional IRA
Traditional IRA contributions are subtracted from your income when calculating adjusted gross income (AGI) and taxable income. So IRAs are powerful tools to lower your taxable income. You can still make a tax-deductible $5,500 contribution with a $1,000 catch-up if you are over age 50. If you are covered by a retirement plan at work, income has to be below $61,000 (single) or $98,000 (joint) to make the full contribution, and the tax deduction phases out completely when your income is above $71,000 (single) or $118,000 (joint).
If you are not covered by a plan at work, then there is no income limit. If one spouse is covered by a plan but not the other, then the phaseouts for the other spouse are $184,000-$194,000. So the good news is that even non-working spouses can make a retirement plan contribution based on the working spouse’s income. And did you know that alimony counts as employment income for IRA contribution purposes? If you are divorced and your only income is alimony, you can still make a tax-deductible contribution. (For related reading, see: How IRA Contributions Affect Your Taxes.)
The deadline for traditional IRA contributions for tax year 2016 is April 18, 2017.
Start and/or Contribute to a SEP IRA
If you’re self-employed, then you can actually still defer much more from your 2016 taxes. How much? The maximum amount of self-employment income that can be considered for SEP IRA contributions in 2016 is $265,000. You can actually contribute approximately 20% of your income into a SEP, so that means if you have $265,000 in income you can contribute $53,000 and defer that amount from 2016 taxes. You can open a SEP IRA and make this contribution up to the extended due date for your business tax return. If you file a Schedule C on your 1040, that date is October 16, 2017.
There are some complications however. If you have employees, you need to make the same SEP contributions to all your employees who are over 21, made over $600, and worked for you in three out of the last five years. Still, this is a great tax shelter for any solo or family business owner.
If you have a larger business, then you might want to look into 401(k), profit-sharing or cash balance defined-benefit plans. These plans allow you to shelter much more money from taxes and allow employees to defer more as well. You can’t use them for 2016 taxes anymore, but it's a perfect time to set one up for 2017.
Contribute to Your HSA
You can still contribute to your 2016 Healthcare Savings Account (HSA) if you had a high-deductible health plan (HDHP) in 2016 and didn’t already contribute the maximum. If you make your HSA contribution via payroll deduction, all is not lost. You can simply write a check for your 2016 HSA contribution and mail it in to your HSA provider. Call them up first to get the right form and address. For 2016, the maximum contribution for individual plans is $3,350 and the maximum for a family plan is $6,750. If you are 55 or older you can make an additional $1,000 catch-up contribution. You have to reduce your contributions by the amount your employer put into your HSA during 2016. Also, these limits are based on your having the HDHP for the entire year. If you had the HDHP for less than a year, your contribution limit is prorated.
The deadline is April 18, 2017 for tax year 2016.
(For more from this author, see: Questioning the Logic of Not Paying Federal Taxes.)