Every year, I make an appointment with my accountant early enough in the tax season to leave room for an additional contribution to my Health Savings Account — just in case it would help my tax situation.If you are in need of another tax deduction for the previous year, you have the chance to make a contribution to a Traditional IRA or a Health Savings Account. You contribution can be used to help you with three main tax situations:
- Reduce your taxable income – One of the main reasons to increase your contributions to a Traditional IRA or HSA is because it can reduce your taxable income. You can boost your own resources with the help of tax-advantaged accounts, while reducing your tax liability.
- Qualify for other income-dependent dependent deductions – There are some tax deductions that are tied to your AGI. Your contributions can help you qualify for certain itemized deductions. Your IRA and HSA deductions are “above the line” so they reduce your AGI in a way that can help you qualify for other deductions further down on your return.
- Avoid phaseouts for certain tax credits and deductions – Such as those for education or for some other purpose. You are just over the threshold, an extra deduction can bring your income below that level and help you avoid the phaseout.
This strategy works best if you are on a line somewhere. If you are trying to claim certain expenses, you might only be able to take the amount that exceeds 2% of your AGI. In the case of medical expenses, the threshold is 7.5% for 2012, and will rise to 10% for 2013. If you are close enough, another above the line deduction or two can help you qualify.
How to Make a Previous Year Contribution
Making your previous year contribution is fairly straightforward. All you have to do is indicate (usually by a checked box) whether or not you are making a current year, or a previous year contribution. You can do this with a Traditional IRA (your Roth contributions aren’t tax-deductible) or with a HSA.
In order for this to work, you need to be aware of your contribution limits. Since I contribute close to the max for my IRA accounts each year, I can’t make an extra previous year contribution when tax season rolls around. However, if I need room for an extra contribution, there is still my HSA. I haven’t been as diligent in contributing as much as I should to the HSA, so there is usually still some leeway. And when a $2,000 to $4,000 contribution to a tax-deductible account might give me just the edge I need, it’s nice to have that option, even after December 31.
You do need to make your previous year contribution by April 15 to be valid. And, of course, if you decide to claim the contribution on your previous year’s taxes, you won’t be able to claim it for the current year. Each contribution can only be claimed in one tax year — no double-dipping.
Have your accountant run a couple of scenarios to see how an extra contribution (with the accompanying tax deduction) might help your tax situation.