While the new year is on the horizon, that doesn’t mean your tax bill is set in stone already. There are certain moves that you can make now that will reduce what you owe. However, you may need to act quickly if you want to benefit from those financial choices this tax year. Here’s a look at five moves that can help you lower your upcoming tax bill.
1. Fully Fund a Tax-Deferred Retirement Account
If you have reached the maximum contribution limit on your tax-deferred retirement account, you still have time. By fully funding your 401(k) or traditional IRA, you are reducing your taxable income, lowering your tax burden.
In 2019, you are allowed to contribute up to $6,000 in an IRA and up to $19,000 in a 401(k). Those over the age of 50 can also make catch-up contributions, essentially increasing the maximum they can sock away in those accounts and the associated tax benefit. For IRAs, the catch-up is an additional $1,000. For a 401(k), it’s an additional $6,000.
By maxing out your contributions to a 401(k) and an IRA, if you’re 50 years old or younger, you could reduce your taxable income by $25,000. Those over 50, you could potentially reduce it by $32,000 by maxing your contributions and adding in the catch-ups.
2. Don’t Overlook Itemizing
While the standard deduction amount means many tax filers won’t benefit from itemizing their deductions, that isn’t the case for everyone. If you want to find out which route is best for you, you’ll need to do the math.
If you’ve had medical expenses that exceed 10 percent of your income, have donated a significant amount to charity, or have enough potential deductions that could push you over the threshold if you itemize, then it’s worth seeing if this approach could benefit you. Additionally, if you realize that you are very close to the standard deduction when you itemize, you could potentially make financial moves to push your itemized total over the threshold (such as donating more to charity or handling a medical issue you’ve been putting off), allowing you to claim a bigger deduction.
This option might be particularly beneficial to those who can handle certain deductible actions for 2020 before 2019 ends. For example, if you usually donate a certain amount to charity each year and you did so in 2019, then consider making 2020’s donation now if it will push you over the line.
3. Claim Every Deductible Business Expense
Many business owners and self-employed individuals have a wide range of deductions they can claim. However, many people miss out on some because they didn’t realize it was an option. Additionally, some filers forgo a deduction because they are worried they’ll get audited, even if it would be completely legal.
As long as a taxpayer is following the rules laid out by the IRS, they should never skip a deduction. If the deduction is legitimate, even if they are audited, they should come out on the other side without a penalty. Just make sure you are ready to prove that you are complying with the laws, which typically isn’t as difficult as it sounds, by being aware of the requirements, preserving the right records, and otherwise having evidence regarding why your action was legit.
4. Unload Losing Investments
If your portfolio is being weighed down by some losing investments, now might be the time to unload them. By selling, you may be able to deduct the losses, effectively offsetting a portion of your taxable gains on your other investments.
It’s important to note that selling an investment solely for a tax deduction isn’t typically a smart choice. If you wanted to get that stock back within 30 days, the IRS could actually take back your deduction, altering your tax bill. As a result, it’s best only to sell investments that no longer work for your portfolio.
5. Stash Cash for College
If you need to save for your education or a child’s future schooling, putting the money into a 529 plan can lower your tax burden on the state level. While there isn’t a federal deduction for investing in a 529 college savings plan, if you live in a state that has an income tax, this can be a smart move for reducing your overall burden.
Just be aware that, if you aren’t the beneficiary, you could encounter gift tax consequences when you contribute to a 529 plan. If the amount you put in the account along with the value of any other financial gifts exceeds $15,000, gift taxes could kick in, creating a different kind of tax burden.
Ultimately, all of the tips above can help you lower your tax bill this year. Consider all of the options above and see if any would benefit you.
Do you know of other ways a household can lower their tax bill? Share your thoughts in the comments below.
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