Last-Minute Tax Strategies for University Professionals
As the April 15 tax filing deadline approaches, so does the seasonal stress that comes with it. While tax planning is most effective within the tax year itself, there are still strategies you can implement before and during the filing process. Here are five last-minute tax strategies for university professionals.
Strategy 1: Make IRA Contributions
Contributions to a Traditional, Roth, or SEP IRA can be made anytime between January 1st and the tax filing deadline of the following year. This flexibility allows individuals to make last-minute IRA contributions and take advantage of the associated tax benefits.
Traditional IRA contributions can help provide an excellent way to reduce taxable income for the year. For the 2024 tax year, the combined contribution limit for Traditional and Roth IRAs is $7,000. Individuals over the age of 50 can contribute an additional $1,000 as a catch-up contribution. However, IRA contributions are subject to income limits, meaning not everyone is eligible. Income phase-out ranges vary based on marital status and whether a workplace retirement plan covers the individual, so it’s important to review these limits before making contributions.
Non-working spouses can still benefit from IRA contributions. If one spouse has earned income that meets the married filing jointly compensation requirement, the non-working spouse may be eligible to contribute to a Traditional or Roth IRA. In 2024, they can contribute up to $7,000, with an additional $1,000 catch-up contribution if they are over 50.
Many university professors have consulting income that can be used to contribute to a SEP IRA. These contributions can typically be made on either a pre-tax or Roth basis, making them a great way to increase retirement savings while also enjoying tax benefits. For the 2024 tax year, SEP IRA contributions are limited to the lesser of 25% of compensation or $69,000.
Strategy 2: Take the Standard Deduction vs Itemizing
In the current tax system under the Tax Cuts and Jobs Act (TCJA), itemizing deductions has become less prevalent as the standard deduction is much higher than in previous years. However, taking the time to review and record all your applicable deductions for the year can potentially increase your tax savings.
Itemized deductions fall into several major categories, including state and local taxes, mortgage interest, charitable contributions, and medical expenses. Each category is subject to different limits and rules, so understanding these regulations can be beneficial in the long run.
Strategy 3: Pay Estimated Taxes
U.S. taxpayers are required to pay taxes as they earn income, often necessitating estimated payments to avoid penalties. While employers typically withhold taxes from salaries or wages, individuals may still have significant unpaid tax liabilities from other income sources. Consulting fees, interest, rental income, and similar earnings usually do not have taxes withheld, potentially leading to large tax bills at year-end.
If you expect to owe estimated payments or anticipate a higher tax liability, you can use your tax refund to make estimated payments for the following year. This can help cover a portion of the required payment before it is due.
Taxpayers generally exempt from making estimated payments include those whose unpaid tax liability is less than $1,000 at tax time or those who meet Safe Harbor requirements for withholdings.
Strategy 4: Familiarize Yourself with Different Tax Credits
With a wide range of tax credits available, there’s a good chance you’ll qualify for at least some. Own an EV? There’s a credit for that.
Tax credits are more advantageous than deductions because they reduce your tax liability dollar-for-dollar, rather than just lowering the amount of taxable income. What does this mean? If you’re in the 24% marginal tax bracket, a one-dollar deduction saves you $0.24 in taxes, whereas a one-dollar credit saves you the full $1.
The government uses tax credits to incentivize certain spending behaviors by helping individuals reduce their tax bills. These credits fall into three categories: refundable, nonrefundable, and partially refundable. As the names suggest, they can either reduce your tax liability to zero or even provide a refund beyond that.
It’s important to check both federal and state tax credits to see which ones you qualify for.
Strategy 5: File an Extension
If you need more time to prepare and file your taxes, consider applying for an extension. Extension requests are due by the April tax filing deadline and grant you an additional six months, extending your filing deadline to October 15th. However, while this extension allows you to file later, the IRS still expects you to pay any taxes owed on time. If you have a significant outstanding tax liability by the October deadline, you may owe underpayment interest. This interest accrues daily and can add up quickly, with the current rate set at 7% for the first two quarters of 2025.
Giving yourself enough time to prepare your taxes is important not only for maximizing your tax savings but also for reducing the stress that comes with tax season. It allows you to research any questions you may have or consult a tax professional to help ensure you get the most from your return.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.