Even though 2023 is behind us and it’s already time to file your tax return for last year, you can still do a few things to cut your 2023 tax bill. Plus, if you do take my advice, you can save for future expenses at the same time. That’s a win-win if you ask me!
But you have to act before you file your federal income tax return for the 2023 tax year. For most people, that return isn’t due until April 15, 2024 (April 17 if you live in Maine or Massachusetts) … so you still have plenty of time.
So, here’s what I recommend: Start working on your federal tax return to get a sense of what your 2023 tax liability looks like before it’s cut back. Put an appropriate amount of money into one or more of the tax-advantaged accounts described below. Readjust your tax return accordingly to see how much you save. And, of course, send your return to the IRS.
That’s the short version. But read on as I provide a deeper look at ways you can still cut into your 2023 tax bill.
1. Contribute to a Traditional IRA
If you’re saving for retirement through your employer’s 401(k) plan, you only have until the end of the year to contribute to your account. So, for example, all 401(k) contributions for the 2023 tax year had to be made by Dec. 31, 2023.
However, with an individual retirement account (IRA), you actually have until the tax filing deadline to make contributions for any particular tax year. That means you generally have until April 15, 2024 (April 17 for residents of Maine and Massachusetts) to put money in an IRA for the 2023 tax year.
But why would you do that now? Why not just put money in an IRA now and have it count as a 2024 contribution?
Here’s why: You can still claim a tax deduction for the 2023 tax year (i.e., on the tax return that’s due this year) for contributions to a traditional IRA made before this year’s tax filing deadline. And this deduction can reduce your 2023 tax bill now.
However, this assumes you haven’t already reached the IRA contribution limit for the 2023 tax year (more on that in a minute). If you’ve already hit the limit, you can’t deduct the excess amount … and, in fact, you’ll be hit with a penalty.
Also note that your deduction could be limited if you or your spouse were covered by a retirement plan at work last year (e.g., a 401(k) plan).
What Are the IRA Contribution Limits for 2023?
As noted earlier, if your 2023 IRA contributions exceed the annual contribution limit, you won’t get a tax deduction for the excess funds and you’ll have to pay a 6% penalty each year the excess amount remains in your IRA.
For the 2023 tax year, the annual IRA contribution limit is $6,500 if you didn’t reach your 50th birthday by Dec. 31, 2023. If you were 50 or older at the end of last year, you can contribute an additional $1,000 (for a total of $7,500). The extra $1,000 is called a “catch-up” contribution.
The annual limits are combined limits that apply to all your IRAs. So, for example, if you’re under age 50 and put $5,000 in one IRA in 2023, then you can’t put more than $1,500 in another IRA for the 2023 tax year.
Your contributions also can’t exceed your earned income for the year (e.g., wages, salaries, tips, professional fees, bonuses, and the like). For instance, if you only had $5,000 of earned income in 2023, you can’t put more than $5,000 in your IRAs for the 2023 tax year.
Can You Get a Deduction for Contributions to a Roth IRA?
No. You can’t claim a tax deduction for contributions to a Roth IRA. The IRA deduction is only available for contributions to a traditional IRA.
Contributions to a Roth IRA are taxable in the tax year for which they’re made. However, unlike withdrawals from a traditional IRA, there’s no tax on distributions from a Roth IRA when you retire.
2. Contribute to an HSA
Health savings accounts (HSAs) are used to save for and pay medical costs. There’s no tax on withdrawals from an HSA if the money is used to cover qualified medical expenses. HSA funds can also be used for non-health care costs once you turn 65. As a result, many people use an HSA to save for retirement along with 401(k) plans and IRAs.
As with a traditional IRA, you can make contributions to an HSA for the 2023 tax year up to April 15, 2024 (April 17 for people living in Maine or Massachusetts). And also like traditional IRAs, you can get a tax deduction for contributions to an HSA for the tax year (although not for contributions made by your employer). So, you can also cut your 2023 tax bill by putting money in an HSA for the 2023 tax year now.
HSAs have annual contribution limits, too. So, if you exceed the 2023 limits, you can’t deduct the excess amount.
In addition, you’re only allowed to contribute to an HSA (or have someone else contribute on your behalf) if all the following are true:
- You’re covered under a high-deductible health plan (HDHP) on the first day of the month
- You don’t have other health insurance coverage
- You aren’t enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return for the year
Your HDHP must also meet certain requirements (see below).
What Are the HSA Contribution Limits for 2023?
The 2023 HSA contribution limits are:
- $3,850 for self-only coverage under an HDHP
- $7,750 for family coverage under an HDHP
If you were at least 55 years old at the end of 2023, you can contribute an additional $1,000 in catch-up contributions to an HSA for the year.
The contribution limits are reduced by any amount contributed to an Archer medical spending account in your name or contributed by your employer to an HSA in your name. It’s also reduced to zero starting with the first month you enroll in Medicare (including periods of retroactive Medicare coverage).
What Are the HDHP Requirements for 2023?
You must be covered by an HDHP that satisfies certain requirements if you want to contribute to an HSA for the 2023 tax year. First, it must have an annual deductible of at least $1,500 for self-only coverage or $3,000 for family coverage.
The HDHP’s out-of-pocket maximum can’t exceed $7,500 for self-only coverage or $15,000 for family coverage. Out-of-pocket expenses include deductibles and copayments, but it doesn’t include health insurance premiums.
Related: How to Invest HSA Funds
3. Contribute to a SEP IRA
A Simplified Employee Pension (SEP) IRA is a special type of IRA designed for small business owners and self-employed people. If you’re self-employed, you can contribute to your own SEP IRA. Business owners with employees can also contribute to their own account, but they must also contribute to each eligible employee’s separate account (employees can’t contribute their own money to the SEP IRA account set up for them).
There’s no such thing as a Roth SEP IRA. Instead, all contributions to SEP IRAs are treated like contributions to a traditional IRA. As a result, a tax deduction is available for small business owners and self-employed people who put money in their own SEP IRA. (Contributions to an employee’s SEP IRA aren’t deductible, but they’re not counted as taxable income for the worker, either).
If you don’t request a tax filing extension, you can make contributions to an SEP IRA for the 2023 tax year up to April 15, 2024 (April 17 for residents of Maine and Massachusetts). If you do get an extension, you can wait until Oct. 15, 2024, to put money in a SEP IRA for the 2023 tax year.
So, there’s still a chance to lower your 2023 tax bill with a tax deduction for contributions to a SEP IRA. Again, you need to put money in your account first, and then file your 2023 tax return and claim the related deduction.
What Are the SEP IRA Contribution Limits for 2023?
As you probably guessed, there are annual contribution limits for SEP IRAs, too.
Let’s start with the contribution limit for employer contributions to an employee’s SEP IRA. For the 2023 tax year, they can’t exceed the lesser of:
- 25% of the employee’s first $330,000 of compensation
- $66,000
The same contribution limits apply to business owners and self-employed people contributing to their own SEP IRAs. However, if you’re self-employed, your compensation is equal to your net earnings from self-employment, minus any tax deductions for contributions to your own SEP IRA and half of your self-employment tax.
This requires a special calculation, the effective result of which is that contributions by self-employed people to their own SEP IRA accounts can’t be more than 20% of the net earnings from their business.
There are no “catch-up” contributions to SEP IRAs for people who are at least 50 years old.
4. Contribute to a Solo 401(k)
A solo 401(k) is a special type of 401(k) plan that’s only available to a business owner with either no employees (i.e., a self-employed person) or just one employee who is a spouse. They’re sometimes called one-participant 401(k) plans, individual 401(k) plans, or uni-401(k) plans.
A solo 401(k) plan is generally the same as an ordinary 401(k) plan, and both traditional and Roth solo 401(k)s are available. However, with a solo 401(k) plan, self-employed people can contribute to their retirement savings with both employer and employee contributions.
As with an SEP IRA, you have until April 15, 2024 (April 17 for residents of Maine and Massachusetts) to put money in a solo 401(k) for the 2023 tax year if you don’t request an extension. With an extension, you have until Oct. 15, 2024, to contribute to a solo 401(k) for the 2023 tax year.
If you contribute to a traditional solo 401(k) for the 2023 tax year before the applicable deadline, you can generally claim a tax deduction for the contribution. The deduction will likely reduce the tax you owe for the 2023 tax year.
What Are the Solo 401(k) Contribution Limits for 2023?
Of course, there are annual contribution limits for solo 401(k) plans, too. However, there are separate annual contribution limits for employee and employer contributions.
For employee contributions, self-employed people can put up to 100% of their earned income for the year into a solo 401(k) account, but these contributions can’t exceed the annual contribution limit. For the 2023 tax year, the contribution limit is $22,500 if you’re under 50 years of age. If you’re 50 or older, you can add catch-up contributions of up to $7,500 for the 2023 tax year, for a total of $30,000.
For employer contributions, a self-employed person can put up to 25% of his or her earned income in a solo 401(k) account each year.
Between employee and employer contributions, self-employed people under 50 can’t put more than $66,000 in total contributions into a solo 401(k) plan for the 2023 tax year. If you’re at least 50 years old, the combined limit jumps to $73,500 for 2023.
Related: 7 Best Self-Employed Retirement Plans
5. Claim the Saver’s Credit
If you put money in one of the retirement accounts listed above for the 2023 tax year (i.e., into a traditional IRA, SEP IRA, or solo 401(k) plan), you might qualify for an additional tax credit of up to $1,000 ($2,000 for married couples filing a joint tax return). It’s like icing on top of the cake.
The tax credit is called the Saver’s Credit. However, it’s only available to low- and moderate-income taxpayers. To claim the credit on the tax return you must file this year, your 2023 adjusted gross income (AGI) must be at or below the following threshold (based on your filing status):
- $73,000 for married couples filing jointly
- $54,750 for head-of-household filers
- $36,500 single filers, married couples filing separately, and surviving spouses
The credit amount is either 50%, 20%, or 10% of the first $2,000 of eligible contributions to a retirement account. Which percentage applies to you depends on your AGI and filing status, but the lower your income, the higher your percentage.
“Saver’s Credit” Becomes “Saver’s Match” in 2027
In a few years, we’ll say goodbye to the Saver’s Credit and hello to the Saver’s Match. Starting in 2027, the credit amount will be deposited into your retirement account instead of subtracted from your tax liability when you file your tax return (although you’ll be able to opt out of the match program if you like).
The amount of the credit/match will also change. It will be 50% of the first $2,000 of eligible contributions to a retirement account for everyone. However, the credit/match will still be gradually phased out if your AGI is above a certain amount.
Extra Time to Make Contributions for Certain Taxpayers
The April 15, 2024, deadline for contributing to the accounts listed earlier (April 17 if you live in Maine or Massachusetts) is pushed back to June 17, 2024, for victims of the following natural disasters:
- Connecticut storms, flooding, and potential dam breach that began on Jan. 10, 2024
- Maine storms and flooding that began on Dec. 17, 2023
- Rhode Island storms, flooding, and tornadoes that began on Sept. 10, 2023
- Tennessee severe storms and tornadoes that began on Dec. 9, 2023
The applicable due date is also delayed until Oct. 7, 2024, for victims of the terrorist attacks in Israel that began on Oct. 7, 2023.
Clarify That Contributions Are for 2023 Tax Year
One final thought on making 2023 contributions to the accounts noted earlier this year: Make sure the account administrator knows that the contribution is for the 2023 tax year.
They won’t know this if you don’t specifically tell them. If you’re making an online contribution, there might be a way to indicate that you’re putting money in the account for the 2023 tax year. However, if that’s not the case, it’s your responsibility to provide that information. Consider calling the administrator before depositing money into the account and ask how to have it applied to the 2023 tax year.
If this isn’t done, your contribution will be applied to the 2024 tax year and you’ll miss out on any tax deductions or credits you might otherwise be able to claim on the 2023 federal income tax return you file this year.
