Take Steps Now to Ease Your Tax Bite
Many of us — maybe even most of us — avoid thinking about our tax obligations until April 15 draws near.
But there are good reasons to start thinking about taxes well before then. In fact, you probably should be thinking about them before New Year's Eve. If you do, you might save a few bucks.
First, though, here's a brief look at a few ways the federal tax return you'll be filing by April 15 will differ from previous ones.
- Higher standard deductions. The deduction for single filers is $12,200, up $200 from 2018, and for married persons filing jointly it's $24,400, up $400. These changes will slightly reduce your tax.
- Higher threshold for out-of-pocket medical expense deductions. The threshold the last two years was 7.5% of adjusted gross income, but for tax year 2019 it is 10%. Of course that means it will be harder to get the deduction.
- No individual mandate penalty. The Affordable Care Act penalized people who didn't have insurance under the Act and didn't have an exemption. That penalty no longer exists.
- Higher limits on retirement accounts. The limit on contributions to 401(k) accounts increase from $18,500 to $19,000, and the contribution limit for IRAs jumps from $5,500 to $6,000.
Act Now and Save on Taxes
Now, on to the pre-year-end tax-saving tips:
- Further your education. You can reduce your tax bill for a portion of the tuition and other expenses you incur for enrolling in a qualified school during the year — even if it's not a degree-granting program. The Lifetime Learning Credit allows you to deduct those expenses on a dollar-for-dollar basis up to 20% of the first $10,000 you spend, or $2,000. So if you've been thinking of enrolling in a class that's grabbed your fancy, do it now and write off part of the expense.
- Contribute as much as possible to retirement accounts. This is almost a no-brainer because money in retirement accounts is tax-free. If you have a 401(k) from work, consider starting your own IRA.
- Defer year-end income to 2020. If you receive a year-end bonus, you may be able to pay less tax by deferring it to next year. If you do freelance work, ask clients to delay payments until after Jan. 1.
- Pay off high medical bills in December. If you or a dependent had high out-of-pocket medical expenses during the year and qualify for the unreimbursed medical deduction (described above), pay as much of it as you can by Dec. 31. The reason: You can only take the deduction of you spend the money.
- Contribute to charity. You can deduct the value of donated items as well as cash contributions, but be sure you are able to document the value of any donated items.
- Invest in improved energy efficiency for your home. If you've been thinking of adding solar panels to your home, do it now and you can deduct up to 30% of the cost.
The holiday season can be a nerve-racking time of year. But if you can find time to look at your finances now, tax time won't be quite so foreboding.