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There are only a handful of days left in 2019, and while you may want to spend them making merry, you should devote at least a little time to brightening your tax picture for next year. When April rolls around (as it will, and sooner than you think), you’ll be glad you did.
1. Max Out 401(k) Contributions
By contributing the maximum amount possible by December 31, you can slash your taxable income 2019 dollar for dollar. For most people, the maximum annual contribution is $19,000. If you are over 50 years old, you can boost that figure by another $6,000. And all you have to do is contact your human services department to find out how to increase your contributions by the rapidly-approaching deadline.
Don’t have an HR Department because you’re self-employed? You may still be able to set up an individual or solo 401(k). You’ll be able to make contributions to your retirement account tax-deferred: up to $56,000 if you’re younger than 50, and $62,000 if 50 or above. Contact a brokerage firm to see if they offer this service. Many that do charge low fees to set them up—or none at all.
2. Take a Look at Your Income Tax Withholding
Did you get a smaller tax refund than you expected last spring? If so, your income tax withholding may have been to blame. The IRS and Treasury Department updated withholding tables last year, to bring them in line with new federal tax law’s increased standard deduction.
It’s important to get your withholding right: withhold too much, and you forgo money you could have used during the year (though you get it back all at once as a large tax refund). Withhold too little, and you end up owing a tax payment.
Changing your regular withholding now may not do much for your 2019 taxes, since there’s so little left in the year. But use the IRS Withholding Calculator to see if you should make changes for 2020. Talk to your employer about filling out a new IRS Form W-4 if you do want to change your withholding.
3. Donate to Charity
Think there’s no point in donating to charity for a tax deduction since the change in the tax law? You can still benefit from making charitable donations if you itemize. If the value of your donations exceeds the amount of the standard deduction—$12,200 for single taxpayers, and $24,400 for married—you can claim your donations as a deduction against your taxable income. Make sure the organization you are donating to is a registered 501(c)(3), and get a receipt as well as documenting the value of any non-cash donations.
If you donate stock for example, the more it has appreciated, the more you can save on capital gains tax by donating it rather than an equivalent amount of cash.
Of course, what you give can be as important as to whom. Making an in-kind gift, such as a gift of appreciated stock, can have significant tax advantages. If you donate stock for example, the more it has appreciated, the more you can save on capital gains tax by donating it rather than an equivalent amount of cash.
4. Harvest Losses
If you have investments in taxable accounts, there’s a chance they lost value this year. If so, you can use that to your (tax) advantage by “harvesting the loss.”) You can use losses on investments to offset any gains, and deduct up to $3,000 per year against ordinary income. If you have losses that you cannot use to reduce your taxes in 2019 because they exceed those amounts, you can carry them forward to future tax years.
Let’s say you have $12,000 in losses and $3,000 in gains. You have net losses of $9,000. You can use $3,000 of those losses to offset $3,000 in ordinary income for 2019, meaning you have $6,000 of losses left. You can carry those losses forward to future tax years to reduce your taxable income in those years.
5. Prepay Tuition
If you will be paying tuition for a child starting college or graduate school in January, you may be able to qualify for a tax credit for 2019 if you prepay their tuition before January 1. The American Opportunity Tax Credit offers up to $2,500 per year in tax credits to families of eligible students. Remember that tax credits are more desirable than tax deductions; while a deduction reduces the amount of your taxable income, a tax credit reduces, dollar for dollar, the amount of tax you owe.
Taking a college class yourself? You may be able to qualify for the Lifetime Learning Credit of up to $2,000.
6. Plan for Your Children’s Future
If your child isn’t headed to college in 2020, you can still save on your 2019 taxes by helping to pay for their education. How? By putting money into a 529 plan account. While contributions to one of these college savings accounts are not deductible from income for federal tax purposes, they are deductible for state tax purposes in over 30 states, including Michigan.
If, like 20% of households with children under 18, you have a child with special needs, a different (or additional) sort of planning may be in order. Contributions to an ABLE account, like those to a 529 plan, are not tax deductible on a federal level, but may be at the state level.
7. Put Money into Your HSA
You may think of your Health Savings Account (HSA) as just the account from which you pay out-of-pocket costs on your high-deductible insurance plan. But HSAs have advantages you may not be aware of. One of these is that you can deposit pre-tax income into an HSA, and withdraw it later to pay for medical expenses (or for any reason after age 65).
If you put those dollars in an HSA today, they are not taxed with this year’s income. And if you withdraw them in one year, or five or ten, for medical expenses, you don’t pay income tax on those withdrawals. That’s right: that money isn’t taxed as income going into your account, and it’s not taxed coming out.
And, of course, it’s never too early to start thinking about planning ahead to reduce your 2020 taxes. If you have questions about small or large changes you can make that will reduce your tax burden, we invite you to contact our law firm to schedule a consultation.