Why Now's the Time to Save on Next Year's Taxes
April 15 has come and gone, and for many taxpayers, the end of tax season was a big relief. Yet even though millions of taxpayers ended up seeing savings from new tax laws following 2017's reform efforts, more than 30 million ended up having to pay at least some tax, according to the latest figures from the IRS. Many taxpayers reported having to pay more in tax this year due to the law changes.
If you just wrote a big check to the federal government, then you shouldn't wait until this time next year to do something about it. By taking action right now to help reduce your tax bill for the 2019 tax year, you'll put yourself in a much better position to pay less to the IRS in early 2020 -- or even get a refund check back from Washington. Here are three places to focus your efforts to try to save on next year's tax bill.
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1. Know your tax breaks
Even with the latest round of tax reform measures, there are still a large number of tax breaks that fly under the radar of many taxpayers. If you don't know about a tax credit, deduction, or other benefit, then you won't claim it on your return, and you'll end up paying more in tax than you should.
With some tax breaks, the only thing you have to do to receive them is to claim them on your return. For instance, the earned income tax credit for 2019 will offer taxpayers as much as $6,557 in money back if they qualify. The credit is especially valuable because it's refundable, which means that you can get a check from the IRS even if you don't owe any taxes. Actual credit amounts depend on income and family size, and most earned income tax credit awards will be much smaller than the maximum amounts. But with income limits as high as almost $56,000 for joint filers with three or more children, the credit is available to millions of Americans -- and yet an estimated one in every five taxpayers who could get the credit each year don't claim it. Similarly, the expanded child tax credit offers $2,000 to qualifying taxpayers with children 16 or younger.
Other tax breaks involve specific actions. For instance, education credits like the Lifetime Learning and American Opportunity tax credits apply to those going to college or seeking additional learning and can save you as much as $2,000 to $2,500 on your taxes. Despite higher standard deductions, some taxpayers can still benefit from itemizing expenses like mortgage interest, charitable donations, and up to $10,000 in state and local tax payments. With more targeted breaks for things like installing solar panels on your home or making contributions to retirement accounts, it's worth it to look at the full range of available tax breaks to see if they can help you.
2. Have less of your income taxed
Maximizing your income is a smart financial move, but there are some steps you can take to avoid having all of that income subject to tax. The most popular and simplest way that most people can reduce their taxable income is to have some of their paycheck funneled into an employer-sponsored retirement plan, such as a 401(k). When you choose to contribute to a 401(k), the amount that goes into your account is excluded from your taxable income. It won't get included in your pay on your W-2 form at the end of the year, instead appearing as a retirement contribution in a special box on the form.
Even if you don't have access to a 401(k), using a traditional IRA can give you many of the same benefits. Unlike a 401(k), a traditional IRA won't affect your reported W-2 wages, but you'll usually be able to reduce your adjusted gross income by the full amount of your contribution. Cutting your taxable income leads directly to lower taxes, boosting the chance that you'll get a refund next year.
3. Be a tax-smart investor
Apart from wages, one key source of taxable income comes from investments. In particular, stocks and other investment assets typically give you two types of income: income in the form of interest, dividends, or other payments; and capital gains from the increase in their value over time.
With investment income, your best bet is to use tax-deferred accounts as much as possible. You won't pay taxes on interest or dividends on assets you hold in an IRA or 401(k), further enhancing their tax benefits.
For capital gains, you have the advantage of getting to choose when you incur taxes. Paper gains aren't subject to tax, and only once you actually sell your profitable investment will you have to pay tax on the gain. Therefore, simply choosing not to sell a winning investment can save you on your taxes. Also, if you have losses on investments, selling them to offset gains on other investments can be a smart strategy as well.
Set the stage for a better 2019 tax year
Most people have already put their tax documents away and won't think about taxes again until 2020 rolls around. But by getting an early start on your tax planning, you'll be more likely to save on your tax bill next year.
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