Still Time to Take Advantage of Some 2019 Tax Deductions
Courtesy of T. Rowe Price
February 18, 2020 Judith Ward, CFP®, Senior Financial Planner
You have until April 15, 2020, to make contributions that could help lower your taxable income for 2019.
These “above the line” deductions are allowed whether you use the standard deduction or itemize your deductions.
Contributions to IRAs, spousal IRAs, SEP-IRAs, and HSAs may be fully or partially deductible for tax year 2019.
Certain households may also benefit from a saver’s tax credit.
Most tax-related activity had to be completed by year’s end to affect taxable income for 2019. However, there are a few ways individuals can still reduce their taxable income for last year. And, these tax deductions are allowed whether you use standard or itemized deductions. Commonly called “above the line” deductions, these are captured on your IRS Form 1040, Schedule 1 as Adjustments to Income, and they must be made by April 15, 2020.
There’s still time to make a $6,000 ($7,000 if age 50 or older) contribution to your individual retirement account (IRA) for the 2019 tax year. You may be able to deduct some or all of the amount of the contribution depending on your income level and if you (or your spouse) are covered by a retirement plan at work:
Tax Year 2019 Income Limits for Traditional IRA Deductibility.
(Roth IRA contributions are not tax-deductible.)
Spousal IRA Contribution
Generally, you must have earned income to contribute to an IRA. However, if your spouse doesn’t earn income or has very little compensation, they can fund their own IRA based on your compensation if you file a joint income tax return. While your combined IRA contributions can’t exceed your combined income, you could possibly double up the amount of your deduction depending on the limits outlined in the table above (See Tax Year 2019 Income Limits for Traditional IRA Deductibility.)
Small business owners and self-employed individuals may use a simplified employee pension (SEP) plan to save for retirement. Each eligible employee, including the business owner, has an individual SEP-IRA under the plan that is funded solely by the employer. The contribution limits are quite generous at 25% of compensation (up to $56,000) for tax year 2019. The contribution amount is tax-deductible for the employer and follows the same tax filing deadline as regular IRAs--April 15.
If you participated in a high deductible health plan (HDHP), you can contribute $3,500 for individual or $7,000 for family coverage for tax year 2019 to a health savings account (HSA). Many people use HSAs to cover immediate, out-of-pocket health care costs. But they are also a good way to invest for the long term, tax-free, to offset future health expenses in retirement. Your contribution amount is generally fully tax-deductible and is recorded on IRS Form 8889 (Health Savings Accounts (HSAs)).
Certain households making contributions to an IRA or workplace retirement plan may also benefit from a tax credit called a Saver’s Credit. If your income is less than certain thresholds you could receive a tax credit up to $1,000 ($2,000 if married filing jointly). While $1,000–$2,000 may not seem like a large sum, a tax credit reduces your tax liability dollar for dollar. This credit, however, will not result in a tax refund if your tax liability is less than zero. If you fall into the following categories, you may want to spend a little extra time to complete IRS Form 8880 (Credit for Qualified Retirement Savings Contributions).
If you haven’t taken full advantage of your 2019 tax deductions, now’s the time to act. Determine what type of contributions you’re eligible for, along with what works best for your overall financial plan. Saving as much as you can now may provide a tax break today, but also grant you valuable time to allow your investments to grow for the future.