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There’s Still Time to Boost Your 2021 Tax Refund

Castlepoint Blog: Kendall's Counsel, The Point
April 05, 2022

Ready or not, the 2021 tax-filing deadline is fast approaching on April 18 for most tax filers, so time is of the essence.

For starters, you may still be able to capture a tax deduction by contributing to a traditional IRA by April 18. This is true even if you have an extension to file your tax return; however, that extension does not give you extra time to make a traditional or Roth IRA contribution. So, if you are thinking about making that contribution you will need to move quickly.

What are the basic rules of contributing to a Traditional IRA?

All income earners can make a Traditional IRA contribution of up to $6,000, regardless of their income amount. Non-working spouses can also make IRA contributions, which means a married couple can potentially put away $12,000.1

Contributions grow tax-deferred, meaning you won’t pay tax on the earnings until you withdraw funds in the future. However, eligibility for a tax deduction is determined by your Adjusted Gross Income (AGI) and participation in a company retirement plan. When you make a deductible Traditional IRA contribution, your income is lowered by the amount contributed.

For example, if you make a $6,000 Traditional IRA contribution, you will pay less tax since your income is knocked down by $6,000. Don’t forget about “catch-up” contributions: anyone who turned age 50 or older in 2021 can add another $1,000 for a total of $7,000.

You may also be eligible for a Roth IRA for 2021, which can be a great long-term wealth-building move, but it will not lower your 2021 tax bill. The contribution amounts for a Roth are the same as a Traditional.

Most IRA custodians are supposed to accept 2021 IRA contributions after April 18 if they are mailed with a postmark by then or earlier. However, consider sending your contribution in prior to April 18 to avoid your deposit being delayed and potentially incorrectly coded as a 2022 contribution.

Finally, don’t forget to claim your 2021 traditional IRA contribution for deduction purposes on your tax return.

If you’re self-employed, contribute to a SEP-IRA.

Small business owners and self-employed workers can save more money in retirement and reduce taxes further by contributing to a SEP, short for Simplified Employee Pension IRA. Another perk of the SEP-IRA is that you can delay your 2021 contributions up to October 15, but make sure you file a tax-filing extension.

For the 2021 tax year, you can sock away the lesser of $58,000 or up to 25% of your compensation, which is significantly higher than a personal traditional IRA.2 

One important note is that if you employ other people, you will likely need to contribute for your employees’ SEP IRAs as well. 

What about a Health Savings Account?

A lesser-used way to save on taxes is to open and fund a Health Savings Account (HSA), a tax-advantaged investment account tied to a qualifying high deductible health insurance plan. As with a Traditional or Roth IRA contribution, you have until April 18 to fund for 2021.

The HSA offers both a deduction on your 2021 tax return and tax-free withdrawals to cover future health eligible expenses. You can put in up to $3,600 for 2021 as an individual, or up to $7,200 for families. If you are age 55 or older, you can put in another $1,000 for 2021.3

529s are a great way to reduce your Oklahoma state tax.

You should consider contributing to an Oklahoma 529 College Savings Plan if you desire to help pay for a child or grandchild’s private school or future college expenses. Married couples filing jointly can deduct up to $20,000 off an Oklahoma state tax return, and all other filing types can deduct up to $10,000.4

While many 2021 tax savings strategies are no longer available, you now know there is still time to boost your tax refund by acting before April 18.  Just make sure you consult with your tax advisors prior to making any final decisions.

Sources:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  1. https://www.irs.gov/retirement-plans/how-much-can-i-contribute-to-my-self-employed-sep-plan-if-i-participate-in-my-employers-simple-ira-plan
  1. https://www.irs.gov/pub/irs-pdf/p969.pdf
  1. https://www.ok4saving.org/plan/tax.php 

The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.

Castlepoint Wealth Advisors | Oklahoma Wealth Advisors | Kendall King - Founder & CEO

Kendall King, CFP®, AEP®

Founder & CEO of Castlepoint Wealth Advisors

Kendall is the Founder and CEO of Castlepoint Wealth Advisors, an Independent Wealth Management firm in Oklahoma City. He is responsible for the strategic direction and vision of the firm, and serves as lead advisor to a diverse group of clients, with special focus on entrepreneurs. With more than 18 years experience in advising clients on a wide range of wealth management topics, Kendall possesses extensive expertise and specialized knowledge regarding IRA and retirement planning topics.

Read more Kendall’s Counsel blog posts and articles.