If you are an American, spring-time is the time for filing your tax return. And if you are like most Americans, you wait until the deadline to file it. Personally, I like to file my taxes as soon as I have all the required forms (typically early February). In the event I am due for a refund, I get my money back earlier. And if I owe more taxes, I still file the return early, but can schedule the payment when it best fits my budget and closer to the deadline.
This year, I'm particularly thankful I filed early. Why? Because it saved my family $800 in taxes.
If you've read some of my other financial posts, you know that I emphasize saving for retirement. For most people, including myself, the Roth IRA is the best way to go. Saving for retirement can also reduce your tax liability. If your Adjusted Gross Income (AGI) is under a certain threshold (for 2019, the cap is $64,000) and you meet a couple other requirements, you can claim what's called the "Saver's Credit" for contributing to your Roth or traditional IRA. The lower your AGI, the greater possible credit you can claim. When filing my taxes, I found that my AGI was barely over the cap by just $1500, meaning I was ineligible for the credit.
Here's where things get interesting. You are allowed to contribute to your IRA from a previous year up to the tax filing deadline. Therefore, I have until mid-April to contribute to my IRA and apply those contributions to 2019. Additionally, contributions to a traditional IRA are tax deductible.
So today I opened a traditional IRA (I only had a Roth IRA previously), and scheduled weekly contributions between now and mid-April that total just over $1500. Simultaneously, I reduced my scheduled Roth IRA contributions to offset this amount. Now, my AGI for 2019 will be under the $64,000 cap, allowing me to claim a $400 Saver's Credit on my federal return. Combining this credit with the reduced taxes I now owe on a smaller AGI for both my federal and state tax return, I'm saving close to $800 in taxes. Now, instead of owing $400 in taxes, I'm getting a $400 tax return!
In other words, I've already received a 50% return on my $1500 investment. Nice! If I had waited until the last minute to file my taxes, there's a good chance I would have missed this opportunity to save. Maybe there is something to that old adage, "The early bird catches the worm."
So, don't wait. Prepare your taxes now. And, speaking of IRAs, if you want a full, easy breakdown of the different types of retirement savings accounts, check out my post here.