With the year soon coming to a close, Americans have only a short time to get their financial houses in order. Chief among them, experts say, are six tax-planning strategies that can lower your tax bill come April 15. Many taxpayers are still getting a handle on the impact of the Tax Cuts & Jobs Act of 2017. The law, which went into effect in 2018, has touched everything from charitable donations to state and local tax deductions. That’s why tax experts say it’s especially important to review your taxes before the year ends. Check out these tips from CBS News that could help lower your tax bill. ~Cathy
Check your withholding.
With just a few weeks left in 2019, it’s important to check whether enough has been taken out of your paycheck this year to cover your taxes. The Internal Revenue Service has a handy calculator that can help you determine whether you should adjust your withholding. Self-employed workers, however, should have been making quarterly payments throughout the year.
If you’re due for a refund, you could also choose to lower your withholding to give yourself some wiggle room for holiday shopping and charitable giving, according to CBS News business analyst Jill Schlesinger. That could help avoid racking up holiday credit card debt for the roughly 1 in 4 Americans who expect to go into debt during the holiday season, according to Credit Karma. Some are still paying debt from last year.
Boost your retirement.
Lowering your tax bill can be accomplished by saving for retirement, since in some cases contributions are tax deductible. Workers can stash up to $19,000 this year in their 401(k), while employees 50 and older can contribute up to $25,000.
If you still have cash to burn, consider setting aside those extra dollars in an IRA —up to $6,000 for 2019, according to the IRS limit for this year. Because contributions to traditional 401(k)s and IRAs are tax deductible, setting aside that money will help lower your current taxable income, while also giving you the benefit of compound interest between now and when you retire.
Review your capital gains.
Savers with mutual funds in taxable accounts can expect a payout of the gains they’ve realized throughout the year, which they can then choose to cash out or reinvest. Other investors may have sold stocks or other assets, securing a profit. Come April 15, the IRS will want you to pay up, thanks to the capital gains tax.
One way to reduce the impact of the tax: Review your portfolio and sell securities that have declined in value since purchasing them. Because losses can offset capital gains, selling stocks or funds that have slumped in value can help reduce your tax bill.
Bundle your charitable contributions.
Taxpayers who itemize deductions may want to bundle several years of donations to a charity in 2019, allowing them to claim a bigger deduction. The adjusted gross income limit on cash donations to qualified charities was expanded from 50% to 60% of the donation under the Tax Cut and Jobs Act of 2017, which allows bigger donations to qualify for deductions. You can also contribute a lump sum to a donor-advised fund, which allows you to recommend grants from the fund to a charity over time.
A caveat: This approach may not be practical for most taxpayers. Because the new tax law almost doubled the standard deduction, a majority of taxpayers won’t qualify for itemizing. The standard deduction in 2019 stands at $12,200 for single filers and $24,400 for married couples filing jointly.
“A lot of my clients who would itemize deductions in the past will no longer need to do that for federal tax purposes, because the standard deduction is larger than their itemized deductions,” said Tim Tikalsky, tax principal with Sensiba San Filippo.
Save for your kids’ college.
If you have children or are planning to have children, you can start saving for that outrageous college tuition bill now — which can reduce some taxes over your lifetime.
One popular savings vehicle is a 529 plan, which can help pay for qualified education expenses such as tuition, mandatory fees and even room and board. Because they’re typically state sponsored, you can’t deduct your contributions on your federal income taxes, but you may be able to claim the deduction on your state return. Plus, your savings will grow tax free.
If your children choose not to go to college, all’s not lost. Those funds can be transferred to another beneficiary, like your nieces and nephews — or even yourself — for qualified educational pursuits.
Tap your flexible spending accounts
If you have a flexible spending account through your employer, now’s the time to draw it down.
Tax-advantaged health planning accounts can help pay up to $2,700 of medical expenses, including co-payments, deductibles and some drugs. They can also be used for medical equipment like crutches or supplies like Band-Aids.
Money that goes into these accounts avoids both income and Social Security taxes. But unless your employer allows a grace period of 2.5 months to use the leftover cash or up to $500 to carry over into 2020, those funds are gone if you don’t claim them by year-end.
I hope you enjoyed Cathy’s Tuesday Tip this week. To view more of Cathy’s Tuesday Tips, visit our blog.