How to pay less in taxes!

Tax season. A time when filers scramble around to collect various tax documents, like Form W2, 1099s, and any tax- deductible receipts they can get their hands on.

While it may be a bit too late to make many tax saving changes now, there is still one trick you may be able to pull out of the hat...a deductible contribution to a Traditional IRA. Most think the contribution must be made before they hit the send button on their return. That is not the case-

You can actually use your refund as your contribution. Just make sure to have the funds deposited into a qualified account by the filing deadline (April 18th for 2022).

A bit confused still. Let's break it down...

What is a refund, really?

Let us say that you have prepared your tax return, and it shows you overpaid your fair share of taxes by $1,500. Before you get too excited, remember this is the amount you overpaid, meaning you gave the government an interest-free loan. Think of taxes like a game of horseshoes...the closest to the target (in the tax world, the target is $0 overpayment) wins.

So, you unknowingly gave the IRS too much money throughout the previous year, and now they owe you that money back. You can take what is yours, and purchase $1,500 worth of tacos, cotton candy, or jellybeans. It is your money, after all. However, another option would be to redirect it towards reducing your taxable income. How? You can use the anticipated return as your deductible Traditional IRA contribution.

Reading the fine print

As I mentioned above, you have until April 18th this year to contribute into your Traditional IRA. Nowhere does it state that the contribution must be made before you file your tax return. So, claiming the contribution on your tax return, filing your return, receiving your refund, then using the refund to fund the contribution is just fine.

Sound too good to be true? Maybe, if you do not provide enough time for the pieces to come together. In a January 2022 article published by Tax Foundation, a report issued by National Tax Advocates show that as of December 2021, the IRS is still backlogged with some $6.2 million unprocessed returns from last year.

When will I receive my tax refund?

Does this mean that returns filed this year will run a bit late? According to the IRS, the average expected refund turnaround this year is about 21 days. For early filers, this should provide adequate time to use the strategy described above. For those counting the minutes until the approaching deadline, this won't work for you. Well, not unless you have an extra $1,500 sitting around with which you can float yourself a short-term loan.

Michelle holds the financial designations of ChFC®, CRPC®, CEPF®, FPQP™, CFF, CCC, CFHC, is a Registered Investment Advisor Representative and President of Personal Money Planning. She is writes Fix Your Budget blog, and has over 28 years of experience in the financial industry.