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You still have a chance to pay the IRS less this year.
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Many people who file a tax return wind up seeing a refund hit their bank accounts weeks later. But what if you’re part of that group of people who have underpaid their taxes and now owe the IRS money?
It’s a situation more people might encounter during this year’s filing season. In 2021, a number of key tax tax credits got a boost to provide aid earlier in the pandemic. But those enhancements went away in 2022, so this year, filers may be looking at lower refunds and, in some cases, underpayments.
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If you come to realize that you owe the IRS money for 2022, don’t panic. You still have one great option for slashing your tax bill — provided you move quickly.
There’s still time to max out your IRA
The more money you put into your IRA account, up to the maximum allowable contribution by the IRS, the more income you can shield from taxes. In 2022, IRAs maxed out at $6,000 for workers under age 50 and $7,000 for those 50 and over. (This year, those limits are up by $500.)
Meanwhile, even though 2022 is long behind us, it’s not too late to put money into your 2022 IRA and have it count toward that tax year. In fact, you have up until the tax-filing deadline to finish funding your IRA, which means that as long as that extra money hits your account by April 18, you’re good to go.
So, let’s say you owe the IRS a few hundred dollars this year, but getting an additional $1,000 tax deduction will wipe out that liability. If you’re able to put another $1,000 into your 2022 IRA, you might achieve that goal while also setting yourself up with more income for retirement.
To be clear, though, you’ll only get an upfront tax break on your contributions if you put money into a traditional IRA — not a Roth. Roth IRAs offer many benefits, like tax-free withdrawals during retirement. But the money you contribute to a Roth won’t serve as a near-term tax break. So if you’re going to sneak more money into your IRA for the express purpose of lowering your 2022 tax bill, make sure it’s a traditional IRA.
Don’t wait until the last minute
For your IRA contribution to count for 2022 purposes, that money must be in your account by April 18. So don’t wait until the day before to make that transfer, in case something goes wrong. Instead, make an effort to get that money moved over as soon as you can.
If you don’t have the cash to make that transfer in full, put in whatever cash you have now. The more you contribute to your IRA if you haven’t yet maxed out, the more tax savings you stand to reap.
Along these lines, it really does pay to prioritize IRA contributions in your budget. And if you start making changes once you’re done funding your 2022 IRA, you may find that you’re able to more easily max out your 2023 IRA.
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