May 17 is IRA and HSA Deadlines

The IRS came out today and announced that the IRA and HSA deadlines are May 17, not April 15.  This was expected, but it is nice to get confirmation.

Most farmers understand that they can make a 2020 IRA contribution by May 17,  2021 and have it count as a deduction on their 2020 income tax return.  But many farmers don’t know that the same rule applies to making contributions to your Health Savings Account (HSA).  You can top off that contribution by May 17 and have the extra apply toward your 2020 tax return.

You can not exclude up to $20,400 of unemployment income ($10,200 for each spouse) if your modified adjusted gross income exceeds $150,000 even if by a dollar.  Making an HSA or IRA contribution could get AGI under that number.  This is an extremely high marginal tax savings.  Here is an example:

Assume your AGI is 150,010 and you have $20,400 of qualifying unemployment (each spouse gets $10,200).  You are in a 22% tax bracket which results in an extra $4,488 of income tax.  If you make an $11 contribution to your HSA, this drops your tax by approximately $4,490 or a 40,818% marginal tax decrease ($4,490 divided by $11 multiplied by 100).

Also, this is a bit of quirky provision in that married filing separate taxpayers appear to be able report $150,000 each versus married filing joint being limited to $150,000.  If your AGI exceeds $150,000 and you received unemployment, it may make sense to check to see if married filing separate will reduce your tax bill.  This may be one of the few times where it will.  The IRS has not yet confirmed this, but the law simply refers to “the taxpayer” and makes no distinction between single or married couples on the AGI.  Two single persons not married could each report $150,000 of AGI and still get full reduction.  It would be good if the IRS could clarify that this is the correct interpretation.

The IRS was very quick to provide guidance on the CARES Act in March/April of 2020.  They have been very slow to provide guidance for the last two major rounds of stimulus.  Part of this could be due to the transition from the Trump administration to the Biden administration.