Updated: Apr 11
As we approach April 18, 2022, the tax deadline for filing 2021 taxes, I am listing a checklist of items that can be done before that date. I have also included links to a couple of flowcharts* to guide you through the rules.
Maximize HSA Contributions for 2021. If you or your spouse opted for a qualified High Deductible Health Plan (HDHP) in 2021, you can maximize your contribution up to $7,200 for married-filing jointly ($3,600 for single filers) before this year's tax deadline. HSA contributions have tripe-tax benefits since the contributions are pretax, and the growth and withdrawals for qualified expenses are tax-free. Add up the total contributions to HSA from your last pay stub for 2021 and the employer contributions to see if you still have room to maximize the contributions to your HSA account. You can also contribute $1,000 catch-up contributions if you are age 55 and older. Contact your HSA provider to see how you can contribute to the HSA for 2021.
Contribute to Roth IRA if eligible. If your income (MAGI) for 2021 is between $198,000 and $208,000 for joint filing ($125,000 and $140,000 for single), you and your spouse can contribute $6,000 to Roth IRA directly even if you/your spouse have an employer-sponsored plan. You can contribute an additional $1,000 if you or your spouse is over age 50. The Roth contributions are limited by the earned income for the year 2021.
Do Backdoor Roth IRA Conversion. If you/your spouse do not have Traditional IRA accounts, you and your spouse each can each contribute a non-deductible $6,000 ($7,000 if you are age 50 or over) for the year 2022 and immediately convert to a Roth IRA, also called backdoor IRA conversion. You must file IRS Form 8606 if you contribute to non-deductible IRA and convert it to Roth. There are two caveats to backdoor Roth: 1) you/your spouse must have earned income to the extent of the contributions and 2) each of you or your spouse performing the backdoor Roth conversion should not have an IRA account balance in order to avoid triggering "pro rata rule" resulting in additional taxes. Click here to see "Can I make a backdoor Roth IRA Contribution?" flowchart. If you already have an traditional IRA balance, you can do the next best thing described below.
Contribute to Traditional IRA. There is a general myth that you cannot contribute to traditional IRA account for you or your spouse if either of you are participation in an employer sponsored retirement plan such as 401(k), 403(b) etc. If you or your spouse has earned income, you and your spouse can contribute to their respective IRA account up to $6,000 ($7,000 if you are age 50 or over). There is no upper limit on the income to contribute to the IRA account. However, the deductibility of the contribution is limited by income and whether you or your spouse participated in an employer-sponsored retirement plan. Click here for "Can I make a deductible IRA Contribution?" flowchart. Additionally, the amount contributed to traditional IRA and Roth for you (or your spouse) cannot exceed the $6,000 (+$1,000 over age 50). You can choose any combination of amounts towards IRA and Roth IRA for the year as long as it is less than the maximum allowed. You may ask, why contribute to non-deductible IRA if I am not eligible for tax-deduction. The reason is that the money grows tax-free until you withdraw after age 59.5.
Contribute to SEP-IRA or Solo 401(k) if Self-Employed. If you received income as an independent contractor (receiving 1099-MISC) or you have your own business like a LLC, you can contribute 20% of your net income to SEP-IRA. Better still, if you have an individual 401(k) account opened prior to 2022, you can contribute up to $58,000 (additional $6,500 catch-up contributions for age over 50). Please check with a CPA or your advisor on how to maximize this before the tax deadline.
Open Roth IRA or IRA for Child. If your child had earned income, they can be dependent on your tax return but file their taxes to take advantage of contributions to Roth IRA (preferable) or deductible IRA up to the maximum of $6,000 or earned income. Any child, regardless of age, can contribute to an IRA provided they have earned income. Parents or others can contribute to this account as a gift as long as they don't exceed the child's earned income. Earned income does not include passive income such as interest, dividends, capital gains or rental income. Generally, it is beneficial to file a separate tax return for the child because they will likely pay lower taxes instead of your marginal income tax.
Pay Q1 Estimated Taxes. April 18, 2022 (Monday) is the deadline for filing the first quarterly estimated taxes for 2022 for the IRS as well as your state taxes. This is not only for self-employed but also for people , who received additional income through bonuses, RSUs vesting or who sold stocks for gains during January through March, 2022. Typically, the income withholding from RSUs is set to the default of 22% by the employer. However, you/your spouse may have a joint income that is in 32% or higher bracket. The gap between what is estimated tax bracket and the withholding would be due on April 18, 2022 both for IRS and the state taxes.
File for Extension. Due to several reasons, you may not be able to complete your tax filing by the tax date and you plan to file for an extension. Stating the obvious, April 18 is also the deadline for filing for an extension for Federal Taxes using IRS Form 4868. An estimate of balance owed to the IRS must be paid with the form before the deadline. IRS has partnered with several tax preparation vendors to e-file an extension for free that can be found here.
If you have filed taxes already and you would like to make adjustments based on the items above, you can always file for an amendment. If you are still in the process of filing your taxes, check to make sure the tax return is error-free before filing. My financial planning service includes tax analysis of your tax return for identifying opportunities for tax savings and tax planning for the long-term. If you need help with tax planning and other services, please schedule a no-obligation, free initial consultation.
Disclaimer: This write-up is for educational purposes only and it is not personal advice. Please consult your a CPA or your tax planner for your situation. *The flowcharts are licensed from fpPATHFINDER.