An unexpected tax bill can ruin anybody’s day. To help avoid that unpleasant surprise, here are 10 easy moves you can make to cut your tax bills.
1. Tweak your W-4 & Stash money in your 401(k)
The W-4 is a form you give to your employer, instructing it on how much tax to withhold from each paycheck.
* If you got a huge tax bill this year and don’t want another surprise next year, raise your withholding, so you owe less next April.
* If you have an enormous refund, the complete opposite, and also minimize your withholding – normally, you might be unnecessarily living on less of your paycheck throughout the season.
* You can change your W 4 at any time.
Less taxable revenue means less tax, and 401(k)s are perhaps the best way to minimize tax bills. The Irs does not tax what you divert directly from your paycheck into a 401(k).
* For 2019, you can funnel up to $19,000 per year into an account.
* If you’re 50 or older, you can contribute an extra $6,000.
* These retirement accounts are usually sponsored by employers, although self-employed people can open their own 401(k)s. And if your employer matches some or all of your contribution, you’ll get free money to boot.
2. Contribute to an IRA
here are two major types of individual retirement accounts: Roth IRAs and traditional IRAs.
You may be able to deduct contributions to a traditional IRA, though how much you can deduct depends on whether a retirement plan at work covers you or your spouse and how much you make.
For the 2019 tax year, you may not be able to deduct your contributions if a retirement plan at work covers you, you’re married and filing jointly, and your modified adjusted gross income was $123,000 or more.
There are limits to how much you can put in an IRA, too:
For 2019, the limits were $6,000 per year or $7,000 for people 50 or older.
Until the April tax deadline, you have to fund your IRA for the previous tax year, which gives you extra time to take advantage of this strategy.
3. Save For College
Setting aside money for Junior’s tuition can save a couple of bucks off your tax bill, also. A popular alternative usually contributes to a 529 strategy and a savings account operated by the educational institution or a state. You cannot deduct your contributions from your federal income taxes. However, you may have the opportunity to on your state return if you are putting money in your state‘s 529 programs. Be aware, too, that there may be gift tax consequences if your contributions plus any other gifts to a particular beneficiary exceed $15,000.
4.Fund Your FSA & Subscribe Your Department Care FSA
The IRS lets you funnel tax-free dollars directly from your paycheck into your FSA every year, so if your employer offers a flexible spending account, you might want to take advantage of it to lower your tax bill.
* In 2019, the limit is $2,700.
* You’ll have to use the money during the calendar year for medical and dental expenses, but you might also be able to use it for related everyday items such as bandages, pregnancy test kits, breast pumps, and acupuncture for yourself and your qualified dependent.
* Some employers might let you carry up to $500 over to the next year.
This FSA with a twist is another handy way to reduce your tax bill — if your employer offers it.
* The IRS will exclude up to $5,000 of your pay that you have your employer divert to a Dependent Care FSA account, which means you’ll avoid paying taxes on that money. That can be a huge win for parents of kids under 13 because before- and after-school care, daycare, preschool, and day camps usually are allowed uses.
* Eldercare may be included, too.
* What’s covered can vary among employers, so check out your plan’s documents.
5. Rock Your HSA
If you have a high-deductible health care plan, you may be able to reduce your tax burden by contributing to a health savings account, which is a tax-exempt account that you can use to pay medical expenses.
* Contributions to HSAs are tax-deductible, and withdrawals are also tax-free, as long as you use them for qualified medical expenses.
* For 2019, if you have high-deductible health coverage on your own, you can contribute up to $3,500.
* If you have high-deductible family coverage, you can contribute up to $7,000 in 2019.
* Your employer may offer an HSA, but you may also be able to start your own account with a bank or other financial institution.
6.See if you’re eligible for the earned Income Tax Credit(EITC)
The rules can get complex, but if you earned less than $56,000, the earned income tax credit might be worth looking into. Depending on your income, marital status, and how many children you have, you might qualify for a tax credit of more than $6,000 in 2019.
A tax credit is a dollar-for-dollar reduction in your actual tax bill instead of a tax deduction, which reduces how much of your income gets taxed. It’s truly found money because if a credit reduces your tax bill below zero, the IRS might refund some or all of the money to you, depending on the credit.
7.Give it away
Charitable contributions are deductible, and they don’t even have to be in cash.
If you’ve donated clothes, food, old sporting gear, or household items, for example, those things can lower your tax bill if they went to a bona fide charity and you got a receipt.
Many tax software programs include modules that estimate the value of each item you donate, so make a list before you drop off that big bag of stuff at Goodwill — it can add up to big deductions.
8. If you’ve been in the hospital or had other costly medical or dental care, keep those receipts.
In general, you can deduct qualified medical expenses that are more than 10% of your adjusted gross income for that tax year. So, for example, if your adjusted gross income is $40,000, anything beyond the first $4,000 of your medical bills — 10% of your AGI — could be deductible. If you rang up $10,000 in medical bills, $6,000 of it could be deductible in this example.
9. Sell those dogs weighing down your portfolio
Knowing you’re getting a tax deduction might make it a little easier to unload some of those bad stock picks that have been weighing down your portfolio.
* You can deduct losses on stock sales, which can offset any taxable capital gains you might have. The limit on that offset is $3,000, or $1,500 for married couples filing separately.
* One other note: Never let tax avoidance become a substitute for wise investing. Sell a stock only if it truly doesn’t work for your portfolio anymore. Don’t do it to get a tax break because if you decide to buy back your stock within 30 days, the IRS can take back your deduction.
10. Get the timing right
From a tax perspective, there’s a huge difference between doing something on Dec. 31 and doing it a day later. If you know an upcoming expense will be tax-deductible, think about whether you can pay for it this year rather than next year. Making January’s mortgage payment in December, for example, could give you an extra month’s worth of mortgage interest to deduct this year. Similarly, if you know you’re near the threshold for the medical expenses deduction, moving that root canal up might make the pain more bearable if the cost suddenly becomes deductible, too.
