It's tax season again. As always, people start to reach out and want to see if there is any way they can save some taxes for last year. My answer to them is always this: you are asking the right question but at the wrong time. Tax planning for a year needs to be done way before December 31 of that year, not the following year. You could learn some of the tax planning strategies from my previous blog post "10 Tax Planning Opportunities Before Year-End For Individuals". Having said that, there are still three things that you may be able to do before the tax due date to improve your tax situation now or in the long run.

1. Contribute to retirement accounts.

Unlike your retirement plan at work like a 401k, which you generally can no longer make 2019 contributions after December 31, 2019, you can still open an Individual Retirement Account (IRA) and make 2019's contributions by the tax due date in 2020.

There are two types of IRAs, Traditional IRAs and Roth IRAs. You could learn more about the differences between the two easily online. Just watch out the deductibility rules on Traditional IRAs, the income limitation on Roth IRAs, and the maximum allowable amount for both. If you are only eligible to make non-deductible Traditional IRA contributions, you can consider a strategy commonly called "Backdoor Roth IRAs."

For self-employed people, if you have already set up a retirement plan like a SIMPLE IRA, a SEP IRA, or a Solo 401k in 2019, you can still contribute to it until the due date of your business tax return, including extensions in 2020. The due date varies depending on your business structure. If you haven't set up any retirement plan for your business yet, it's too late to set up a SIMPLE IRA or a Solo 401k to make 2019's contributions. However, you can still set up a new SEP IRA and make last year's contributions until the due date of your business tax return, including extensions.

2. Contribute to Health Savings Accounts (HSAs)

In my opinion, HSA is the most tax-advantaged account for investment. For people who are not familiar with it, I recommend you read my previous blog post here.

Similar to IRAs, you can still open an HSA and make 2019's contributions by the tax due date in 2020. Unlike IRAs, not everyone is eligible for an HSA.

For people who have an HSA through work, the best way to contribute is through payroll deduction since you can save some payroll taxes as well under most plans. Unfortunately, similar to your 401(k), you can no longer make 2019's contribution in 2020 that way. However, if you haven't maxed out your 2019's contributions, you can still contribute to the same HSA or another HSA by yourself. In this way, you won't be able to save payroll taxes on the contributions, but it is still better than doing nothing. Just make sure your total contributions, including your employer contributions, to all of your HSA accounts, don't exceed the maximum amount allowed for that year.

3. Contribute to 529 plans

Most of you probably have heard of 529 plans and know how it works. If you would like to learn more about it, feel free to take a look at my previous blog post "8 Things You May Not Know About 529 Plans".

Not all states offer state income tax benefits for 529 plan contributions. Unfortunately, California is one of them. However, among those states who do offer state income tax benefits, most of them have a calendar year-end contribution deadline. According to Savingforcolleg.com, six states, including Georgia, Iowa, Mississippi, Oklahoma, South Carolina, Wisconsin, allow the taxpayers to make 2019 contributions before the tax due date in 2020 to qualify for a tax deduction.

As you can tell from the above, things you could do to change your 2019 taxes are limited at this point. The only purpose of filing the tax return is to report what already happened last year. Tax planning looks forward, not backward. Don't wait until next year to look for the tax savings opportunities for 2020. Start planning now.

Enjoy reading my blog? Sign up at the bottom to effortlessly stay on top of my blog posts and news for free!

Need help? Email us or Schedule a call today!