4 Quick Money Saving Tax Tips
Over the course of your life, you might spend thousands of hours monitoring your investments and savings.
But how much time do you spend on tax planning?
Filing your taxes is a chore and a bore.
But their complexity (and the potential return on your time investment) means you have-to plan for them (sometimes years in advance) to save as much money as you can.
View it as an opportunity.
Here are 4 tips that could help you keep more of your money in 2019, and beyond.
1) Are you withholding the right amount?
The United States’ income tax system is considered “pay-as-you-go.”
This means you pay, either via payroll withholding or estimated payments, as you earn the money.
But as a rule, should you withhold high or low?
Neither is ideal.
The problem with under-withholding is that the IRS can hit you with interest charges and even additional penalties.
And, yet, overpaying offers you absolutely no benefit (it’s not like the government pays you interest).
Sure, refunds are nice. But they’re merely returning your hard-earned money.
Besides, overpaying not only impacts your cash flow, it keeps that money from working for you.
Here’s what you should do: Do your taxes earlier this year.
When you meet with your accountant, have him or her analyze your withholding so that you can make any adjustments, and so the government isn’t taking too much, nor too little.
2) Time for some pre-emptive itemization.
As we’re more than a year into the new tax law, you’re probably starting to understand the impact of the changes.
The new law makes advance tax planning even more essential. Speak with your accountant to get a handle on whether you’ll be claiming the standard deduction, or itemizing, in 2020 (for the 2019 tax year).
The standard deduction is going up a bit in 2019 to $12,200 for single filers, and to $24,400 for married people filing together.
If your charitable contributions are low this year (2019), and you’re a joint-filer, the new tax law’s higher standard deduction practically makes taking it a no brainer.
But, looking forward, with a little creativity, you can still make charitable donations in a tax-friendly way.
Called “bundling,” if you expect your contributions will be reasonably high this year, you might want to accelerate your donations (by making next year’s (2020) contributions now).
Simply, even for middle class filers, once your contributions hit a certain threshold, then itemizing (as opposed to taking the standard deduction) can still save you money on taxes.
There are numerous complications and considerations. Talk to your accountant early this year and find out if this is a good strategy for you.
3) Counter your investment losses.
2018 ended with a declining market.
That means, at least on paper, many investors lost money.
Did you know under certain circumstances you can use $3,000 worth of investment losses to counter gains from either ordinary income or other investments?
One way to do this is—if you are still employed and received a raise (or bonus) for 2019—claim an investment loss to balance out some of the increase in taxes you’ll be required to pay.
Making a mistake here can be costly, so you need to know exactly what you’re doing.
Using a certain type (and amount) of loss to cancel out a specific type (and amount) of gain is best achieved with the help of a credentialed tax professional.
4) “Time” your RMDs
RMDs are how the government ensures you liquidate a percentage of the savings in your retirement accounts (so they can tax it).
They don’t want you sitting on all that cash forever.
Required minimum distributions (RMDs) kick in on tax-deferred plans when you turn 70½.
Most people love to let their tax-deferred retirement accounts grow and grow for as long as is legally possible. Sounds like a no-brainer.
However, if the beginning of your 8th decade is still a ways down the road, and you have other savings, you might want to lower the balances in your retirement accounts before spending your other money.
Many great savers end up paying thousands of extra dollars in taxes because they didn’t realize they should’ve started drawing from their tax-deferred retirement accounts well before RMDs kicked in.
That’s because the amount of the RMD is based on the balance in your retirement account.
The larger the balance, the higher the RMD, and, typically, the higher amount you’ll have to pay in taxes.
For older readers, if you hit the 70½ mark at any point last year (2018), you must take your first required minimum distribution by April 1st of this year (2019).
But if 70½ is still out in the distance, and you haven’t touched your retirement accounts?
It might be financially advantageous to start.
Tax planning used to be an easy-to-ignore component of financial planning.
Not anymore. (Which is why, rather than merely give tax planning recommendations, we’ve added accounting, bookkeeping, and tax planning services under the Hanson McClain umbrella.)
There’s money to be saved.
Tax planning is like mountain climbing: Mistakes are costly, but the satisfaction of a perfect climb can make all the effort worthwhile.