As we approach tax season, clients frequently ask us for guidance on how to minimize their tax impact. Although you are limited in what you can do for the prior year’s return, there are some smart moves you can make now for the current year.
1. Confirm your withholding is accurate
This is especially important because the taxes you withhold from each paycheck determine whether you’ll get a refund or owe taxes at the time of filing. It is a personal preference whether you like to get a refund or try to get as close to break-even as possible. Either way, it’s always a good exercise to eliminate any surprises at tax time. Simply google tax withholding calculator and you will find a number of resources to help you.
2. Maximize company benefits
Maximize, maximize, maximize
401k – Pre-tax contributions lower the amount of income you pay taxes on. If your employer matches your contributions, take advantage and contribute at least that amount.
HSA Account - Pre-tax dollars are subtracted from the top of your pay before withholding for taxes is calculated, so you don't pay tax on this portion of your income. Distributions from the HSA can be tax-free as well. The max for 2019 is $3,500 for single and $7,000 for family coverage.
Flexible Spending Account – If your employer offers an FSA for medical or dependent care, this is another way to set aside pre-tax dollars for expenses you know you will have this year.
3. Contribute to an IRA
Traditional IRAs are tax deductible on state and federal returns. The max for 2019 is $6,000. *You can still make a contribution for 2018 up until April 15th.
4. Use a 529 to save for education
While there isn’t a federal income tax deduction for contributions, many states offer state-sponsored plans where the contributions may be eligible for a tax deduction. Thanks to recent tax reform, you can now use these plans for private K-12 education expenses as well. (up to $10,000)
5. Deduct expenses even if you take the standard deduction
With the new higher standard deduction, it may no longer make sense to itemize. If the standard deduction is higher than your itemized deductions, you will likely be better off just claiming the standard deduction. But you can deduct things like student loan interest, job-related moving expenses, school teacher supplies, and contributions to IRAs, even if you don’t itemize.
Don’t wait until December to think about your tax situation, the sooner you take action, the better. By taking advantage of these five strategies, you will hopefully lower your taxable income and minimize your tax burden. Give us a call anytime to discuss the best plan to implement these strategies for you personally.