Podcast Summary
Reduce your tax liability with pretax investments: Contribute to retirement accounts or healthcare savings plans before tax deadline to lower 2022 tax bill, but ensure correct contribution year election
If you're facing a large tax bill this April, you may be able to reduce your liability using legal pretax investment vehicles. These options include contributing to certain retirement accounts or healthcare savings plans, which can allow you to characterize contributions made in 2023 as if they were made in 2022. However, it's important to note that these strategies require having available cash or income, and you must elect the correct contribution year to apply the contribution to your 2022 tax bill. While these methods aren't a substitute for consulting a tax professional, they can help individuals hold onto more of their money and potentially ease the burden of a large tax bill. Remember, paying taxes is a civic duty, but understanding the tax code and utilizing legal strategies to minimize your liability is a smart financial move.
Maximizing Business Value vs. Retirement Savings: Businesses can use the American Express Business Gold Card for purchases, while individuals can save for retirement with traditional IRAs, but there are limitations and considerations for both options.
The American Express Business Gold Card can help businesses maximize value from their purchases, while traditional IRAs offer individuals the opportunity to reduce their taxable income and save for retirement, up to $12,000 per year for couples. However, there are limitations and considerations, such as income thresholds and eligibility for employer-sponsored plans. It's essential to understand these rules to make the most of your tax planning strategies. If you're not covered by a retirement plan at work, contributing to a traditional IRA can provide significant tax savings. But if you're already contributing to a Roth IRA or exceed the income threshold, you may need to consider other options. Remember, it's crucial to invest any contributions you make to ensure your money grows over time. For those covered by employer plans, contributing to a Roth IRA is still a good idea, even if it doesn't lower your tax bill immediately. Stay tuned for more information on tax planning and retirement savings strategies.
Maximizing Contributions to a SEP IRA: Self-employed individuals and side hustlers can contribute up to 20% of their adjusted income to a SEP IRA, but should calculate based on net income after deducting expenses.
The SEP IRA is a valuable tool for self-employed individuals and side hustlers to defer income and reduce their taxable earnings. You can contribute up to 25% of your net business income, but since you can also deduct self-employment taxes, it's recommended to calculate your contribution by multiplying your income after deducting expenses by 20%. This can help you contribute around 20% of your adjusted income to a SEP IRA. However, if none of your income comes from self-employment or 1099 sources, or if you've already maxed out contributions to a solo 401k, then a SEP IRA may not be an option for you. If you've underfunded a solo 401k, you can still contribute employer funds in the following year to reach the maximum limit. Remember, it's always a good idea to consult a tax professional for personalized advice.
SEP IRAs: A Retroactive Tax Savings Option: SEP IRAs can be opened and funded in the following year for retroactive tax savings, unlike solo 401ks. No EIN required. Consider complexity if using backdoor Roth IRA strategy. HSAs offer tax benefits for healthcare expenses with potential investment opportunities.
If you missed the deadline to open and fund a solo 401k for the previous tax year, a SEP IRA could be a viable alternative for retroactive tax savings. Unlike a solo 401k, which must be opened and funded by the end of the year to contribute for that year, a SEP IRA can be opened and funded in the following year. Additionally, you don't need an EIN number to open a SEP IRA, unlike a solo 401k. However, if you're currently using the backdoor Roth IRA strategy and want to continue doing so, you may want to consider the added complexity of opening and contributing to a SEP IRA. On the bright side, if you have a high-deductible health plan, an HSA can provide tax benefits for healthcare expenses, allowing you to invest the funds once you reach a certain balance. Remember, it's essential to understand the rules and potential complexities of each option before making a decision.
Maximize your tax savings with an HSA: Contribute pre-tax dollars to an HSA, grow tax-free, and withdraw tax-free for medical expenses. The 2022 limit is $3,650 for individuals and $7,300 for families. Consult a tax professional for best use.
An HSA (Health Savings Account) is a tax-advantaged account that offers triple tax savings: contributions are made with pre-tax dollars, grow tax-free, and withdrawals for qualified medical expenses are tax-free. For the 2022 tax year, the contribution limit is $3,650 for individuals and $7,300 for families. Contributions can be made directly or through payroll deductions, but direct contributions are subject to FICA tax while payroll contributions are not. It's essential to contribute before the tax year ends, and if you've already reached the limit or have a low deductible plan, this strategy won't work. An HSA functions like a second traditional IRA, with no required minimum distributions until age 65, when it converts to follow the same rules as a traditional IRA. This tax vehicle is particularly beneficial for individuals without retirement plans at work, side hustle income, and high deductible health plans, creating a potential "triple tax whammy." However, it's crucial to consult a tax professional and do thorough research before making significant financial decisions. TaxAct is a recommended resource for filing taxes.
