As the year comes to a close, it is important to review options that are available to lower your tax burden. One easy way to adjust your taxable income for the year is to make deposits into deductible accounts. Contributions to retirement accounts and other deductible accounts may reduce your taxable income and, in turn, can lower your tax bill or possibly increase your refund.
Traditional 401(k) plans allow a taxpayer to defer paying income tax on the money you save for retirement by lowering taxable wages/earnings. 401(k) plans are retirement accounts, meaning that any amounts contributed cannot be used without penalty until you reach retirement age, currently 59 ½. These types of accounts are sponsored by employers or self-employed individuals and have an annual contribution limit of $19,000 or $25,000 if the contributor is 50 or older. Often, employers will match an amount of your contributions into the account as well, making this a very attractive option.
Individual Retirement Account (IRA)
Another deductible account is the IRA (individual retirement account). Like the 401(k), amounts in the IRA are set aside for retirement. One special rule of the IRA is that you can contribute amounts for the current tax year up to the April tax return deadline. This is great news if you are looking for a way to reduce your income tax after the year has ended. IRAs are limited to $6,000 ($7,000 if you are age 50 or older by the end of the year) for tax year 2019. The limit is shared between both traditional IRAs and Roth IRAs, meaning that the total amount contributed to both accounts should never exceed $6,000 in a single year. Although choosing to contribute to the Roth IRA instead of a traditional IRA will not cut your 2019 tax bill, it could be a better choice since withdrawals from a Roth IRA can be tax-free in retirement.
Flexible Spending Accounts (FSA)
There is no health insurance policy that covers everything, so FSAs could be a great pre-tax option to help with out of pocket medical expenses and lowering your tax burden. FSAs have an annual contribution limit of $2,700. Unlike other deductible accounts, the amounts left in an FSA account are lost at the end of the year. The use it or lose it rule is not carved in stone. The Internal Revenue Service offers employers the option to allow the employees until March 15 of the following year to use the FSA funds from the previous year.
Health Savings Account (HSA)
HSA’s are a tax-advantaged savings and investment account designed to help taxpayers with high deductible health insurance plans save for their out of pocket medical expenses. Contributions are tax-deductible and withdrawals for qualified medical expenses are tax-free as well. Unlike FSA’s, the amounts in an HSA do not expire at the end of the year. HSAs have an annual contribution limit of $3,500 for an individual or $7,000 for a family. In addition to these limits, if the taxpayer is 55 or older they can contribute an additional $1,000 as a catch-up contribution. If your employer makes contributions on your behalf to your account, these contributions count towards the annual limit.
All of these options are examples of deductible accounts that can be used to reduce taxable income. Please contact your local Blue & Co. advisor if you have any questions or to determine if any of these contributions impact your income tax return.