Another Chance to Save Money on Your Taxes
Norm Miller, Senior Wealth Manager
Most tax-saving opportunities expire at calendar end. There are, however, tactics to reduce your federal and Arizona taxes for the 2016 season with transactions completed in 2017. It’s like a tax strategy do-over.
Traditional and Roth IRAs
The tax code allows taxpayers to make IRA contributions up until April 15 (April 18 this year, as the 15th falls on Saturday and the 17th is a legal holiday in Washington DC – Emancipation Day) of the following year to apply to the prior years’ tax return. Traditional and Roth IRAs have income limitations that establish whether the traditional contribution is deductible and whether the Roth contribution is even allowed. Taxpayers working with their CPAs may not know if the IRAs could be funded in 2016 until the tax return is prepared in March/April 2017. Thus, the Internal Revenue Service (IRS) allows for retroactive application of the contributions.
SEP-IRAs
Simplified Employee Pension (SEP) plans have a contribution due date of the tax filing date including extensions. Extension date for individuals is October 16, 2017. This ability to delay SEP contribution in the following year is allowed because it is not possible to ascertain the correct contribution number until the tax return is prepared. It is important to note that if you do not file an extension, the SEP-IRA contribution must be made by the normal April filing deadline to count for the prior year contribution.
Health Savings Accounts (HSAs)
The IRS also allows taxpayers to apply contributions made in 2017 up to the April 18 filing deadline to their 2016 tax return. This is the same treatment as traditional/Roth IRAs.
AZ Non-Refundable Tax Credits
Versant sent out a piece in last year that detailed the most common Arizona tax credits:
- Qualifying Charitable Organizations
- Qualifying Foster Care Charitable Organizations
- Public Schools
- Private School Tuition Organizations
Arizona changed the law in 2016 to allow for these contributions to be made in the year following the tax return, with the same rules as the traditional/Roth IRAs.
The tax savings can be significant utilizing the tactics above. Traditional IRA contributions can be up to:
- $6,500 per taxpayer (above the line deduction)
- SEP-IRAs can be as high as $53,000 (above the line deduction)
- HSA contributions can be as high as $6,750 (family plan – above the line deduction)
- AZ tax credits noted in this article can be as high as $4,373 for married filing jointly
An interesting implication of the tax rules is that taxpayers have “cash flow arbitrage.” That is, the taxpayer can file their federal and AZ returns, collect the tax savings and then pay the appropriate IRA, HSA, or charity. A major caveat is to be very careful in utilizing this strategy – do not forget to make the “delayed” contribution that you took on your tax return.
Your Versant Capital Management team is here to work with you and your CPA to ensure that you fund the appropriate vehicles that meet your personal goals and reduce your tax liability at the same time.
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