Tax Time Guidance
Tax day is only two weeks away. It is not too late to take steps that may save you money.
- IRA Contributions: If you qualify for a traditional IRA, you have until April 15 to make a contribution for 2023. You can contribute up to $6,500, or $7,500 if you are over the age of 50. The contribution is fully deductible.
- SEP IRA Contributions: If you were self-employed in 2023 and meet certain requirements, you have until the due date of your return (April 15 or October 15, if an extension is filed) to set up and contribute to a Simplified Employee Pension (SEP IRA) for 2023. You can contribute the lesser of up to 20% of your net self-employment income or $66,000. The contribution is fully deductible.
- HSA Contributions: If you qualify, you have until April 15 to contribute to your Health Savings Account for 2023. Individuals can contribute up to $3,850 and families can contribute $7,750 in 2023. Individuals over the age of 55 can contribute an additional $1,000. These contributions are fully deductible.
- Itemizing Deductions: You are entitled to take the higher of the standard deduction or your itemized deductions. Although for many, the standard deduction is generally the higher of the two, with higher home mortgage interest rates and real estate taxes, it is possible that itemizing deductions will provide you a larger deduction. It would be wise to have your tax preparer calculate both.
- Avoid Penalties: Tax returns must be filed with the IRS no later than April 15. Failure to file the return timely will result in a failure to file penalty which accrues at 5% of the tax due per month until it reaches a 25% maximum. For returns that are more than 60 days late, there is a minimum late filing penalty of $485. If you do not believe your return will be ready to file by April 15, then request an extension of time to file. The extension is automatic and will give you until October 15 to file the return. However, the extension must be requested by April 15.
An extension of time to file the return, is not an extension of time to pay any tax which is due. At the time you request the extension of time to file, you are required to pay any tax which will be owed. If you file your return in October and owe taxes, you will incur a penalty for failure to pay tax. The penalty accrues monthly at the rate of ½% of the tax due from April 15 until the time the tax is paid. The maximum penalty is 25%.
- Avoid Interest Charges: If you do not pay the taxes shown to be due on your return by April 15, you will incur interest charges on the tax due. The interest will begin to accrue on April 15 and will continue to accrue until the tax is paid in full. Interest will also accrue on the failure to pay penalty and the failure to file penalty if you are subject to these penalties (see 5 above). The interest rate is subject to change quarterly. The interest rate from April 1 to June 30 is 8%. Note that interest is compounded on a daily basis.
- File an Accurate Return: Gather all necessary documents and make sure you report all your income and deductions accurately. Don’t forget cryptocurrency/digital transactions, sales of property, gig economy income and foreign income. Failure to report all income accurately will in most cases trigger an inquiry from the IRS. If your return omits income and results in taxes being owed, you will not only owe the additional taxes, but you will trigger the imposition of the failure to pay penalty and interest (see 5 and 6 above).
- Report Foreign Bank Accounts/Assets: Do not neglect to answer the questions on your tax return regarding foreign bank accounts. In the event you have a foreign bank account or signature authority over a foreign bank account with a value of over $10,000, you will be required to file an FBAR (Form 114). The penalties for failure to report foreign bank accounts and file the FBAR return are steep.