Most tax-saving strategies have a December 31 deadline, but there are some last-minute moves families can make on or after January 1. Learn how to maximize prior-year tax benefits by making retroactive contributions to 529 plans, traditional and Roth IRAs, Coverdell Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs).
1. Reduce Taxable Income by Claiming a 529 Plan State Income Tax Deduction
Families may be able to reduce their taxable income while helping a child save for college. Contributions to a 529 plan are not tax deductible at the federal level, but over 30 states offer a state income tax deduction or credit for 529 plan contributions. Most states have a December 31 deadline for 529 plan contributions to qualify for a tax benefit, but six states have April deadlines.
Contribution Deadline for 2018 State Income Tax Deduction
|April 15, 2019|
April 30, 2019
April 15, 2019
April 15, 2019
April 15, 2019
April 15, 2019
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2. Reduce Taxable Income by Claiming a Traditional IRA Tax Deduction
Anyone under age 70 ½ who receives taxable income is eligible to contribute to a traditional IRA. Individuals may be able to deduct all or a portion of their contributions to a traditional IRA depending on whether or not they (or their spouse) are covered by a retirement plan at work and meet certain income requirements.
Total traditional IRA contributions in 2018 cannot exceed $5,500 ($6,500 for age 50 or older) and contributions must be made by April 15 in order to qualify for the deduction. These contribution limits are increasing to $6,000 and $7,000, respectively in 2019.
3. Maximize Tax-Free Investment Growth in a Coverdell ESA
Individuals who earn less than $110,000 ($220,000 if married filing jointly) are eligible to contribute to a Coverdell ESA. Coverdell ESAs are tax-advantaged accounts designed to help families save for college and K-12 expenses. Like a 529 plan, investment earnings in a Coverdell ESA grow tax-free and withdrawals are tax-free when used to pay for qualified education expenses.
The maximum amount individual can contribute to a Coverdell ESA is $2,000 per beneficiary (with reduced contribution limits for individuals who earn between $95,000 and $110,000). However, total annual Coverdell ESA contributions to a single beneficiary, no matter how many accounts they have, cannot exceed $2,000. Families who have not maxed out their Coverdell ESA contributions by year-end have until April 15 to try and get to the limit.
4. Maximize Tax-Free Investment Growth in a Roth IRA
In 2018, individuals with a modified Gross Adjusted Income (AGI) of less than $199,000 ($135,000 if married filing jointly) can contribute to a Roth IRA. Contributions to a Roth IRA are not tax deductible, but investment earnings grow tax-free and distributions can be tax-free at retirement. Roth IRAs can be ideal for many families because contributions can be withdrawn tax-free and penalty free at any time for any reason.
Roth IRAs have the same $5,500 ($6,500 for age 50 or older) annual contribution limit as traditional IRAs. Individuals have until April to 15, 2019 to make Roth IRA contributions up to the previous year's annual limit.
5. Maximize Tax-Free Investment Growth in a HSA
A Health Savings Account (HSA) is tax advantaged accounts designed to help individuals save money for out-of-pocket medical expenses. To qualify for an HSA, individuals must be covered under a high deductible health insurance plan, as defined by the IRS. For families in 2018, the minimum annual deductible for a high deductible health plan is $2,700. Annual contributions are limited to the maximum annual deductible and other out of pocket costs, which is $13,300 in 2018.
Contributions to an HSA made through payroll deduction are not taxed, and contributions made by check or automatic bank withdrawal may be tax deductible. Investments in HSAs grow tax-free and distributions are tax-free when used to pay for qualified medical expenses. The deadline to make HSA contributions that qualify for a prior-year tax deduction is April 15.