Tax season can be a very stressful time for a lot of people. You want to make sure that you’re filling out all the required information, but it can also be difficult to know what you’re responsible for. How do you make sure you’re paying only what’s required? At the same time, how can you maximize every deduction available to you?
In order to make taxes as stress-free as possible, we’ve put together this list of our eight best tax tips for tax season. Enjoy!
Tip 1: Take Advantage of Company-Offered 401(k)s [or 403(b)s, TSPs, etc.]
Company-sponsored 401(k)s are retirement plans that are offered by a company to its employees. If you aren’t already contributing to one, we’d recommend getting started. By actively contributing to a 401(k), you’ll be able to save pre-tax dollars while you’re working. By the time your savings are needed to fund your retirement expenses, you’ll most likely be in a lower tax bracket. This is an easy way to generate long-term tax savings.
Tip 2: Make Prior-Year Contributions to Your IRA Until April 15 of the Following Year
If you actively contribute to an Individual Retirement Account (IRA) every year, it’s important to remember that you’re able to make contributions even after the year ends. This means that if you haven’t maxed out your IRA when the year ends, there’s no need to stress or panic. You can enter the new year and still make contributions (up until April 15) that count for the previous year. This is helpful because you’ll have more time to max out your IRA before moving on to the next year. (NOTE: The 2019/2020 IRA contribution limit is $6,000 or $7,000 if over 50. We recommend contributing as much as possible to maximize your pre-tax savings.)
Tip 3: Know if You Have Made any Qualified Charitable Donations
A qualified charitable distribution (QCD) is a distribution from an IRA made directly to an eligible charity, bypassing the owner of the account. QCDs can be made by individuals over the age of 70½, and they can count toward your required minimum distribution for the year. They can be a good way to distribute some or all of your required amount without paying taxes on that portion. Please note: QCDs are limited to $100,000 per year.
Tip 4: Double up on Charitable Contributions Every Other Year to Itemize Deductions
A strategy that has become popular, given the recent tax updates, is what’s called doubling up or “bunching” your charitable gift. This should be done either every other year or two out of three years. The current standard deduction for married filing jointly is $24,800. For most households, this deduction is higher than your itemized deductions. Doubling up or bunching your gift giving may allow you to itemize your deductions in the years you give instead of taking the standard deduction for that year.
Tip 5: Donate Low Basis Stock to Charity
If you’re looking to donate to charity, donating stock can be a better option than selling it and donating the money or just donating cash. The moment you sell a stock, you’re obligated to pay capital gains tax on it. However, if you donate the stock directly to a charity, there’s no capital gains tax to pay. Plus, you are still eligible to deduct the full fair-market value of the asset you donated from your income taxes, up to the overall amount allowed by the IRS.
Tip 6: Roth Conversions
If you aren’t familiar, a Roth conversion is the process of moving assets from a tax-deductible traditional IRA to a non-deductible after-tax Roth IRA. Participants in Roth IRAs don’t pay income tax when they withdraw those funds in retirement because the money deposited into a Roth is from after-tax income. Roth conversions can be a good strategy to investigate, especially if you feel you are in a smaller tax bracket now than you will be in retirement.
Tip 7: Review Your Exemptions if You Get a Refund or Owe Money to the IRS
A tax exemption is an amount of money you’re allowed to subtract from your taxable income. The more exemptions you’re able to take, the more you can lower your tax bill. If you get a refund check or owe money to the IRS, it’s important to go back and review the exemptions that you’ve made. By staying on top of your exemptions and what you’ve paid or owe, you won’t ever have to worry about getting into a sticky situation with the IRS. We realize that it can be tricky to constantly stay on top of every detail of your financial situation. This is what brings us to our last and most important tax tip.
Tip 8: Hire a Professional if Your Taxes Become too intricate
Despite the cost, this can be one of the best decisions that you make. Taxes can be a headache if you aren’t familiar with them, and by hiring a professional, you’ll save time and stress. Not to mention that accidents can still happen when filling on your own. Even if you’re very up-to-date and on top of your financial health, it’s still possible for you to make a mistake or miss something. Better to let a professional handle it. What you may find is that by hiring a professional you might have a bigger refund or owe less to the IRS. It’s not uncommon for big tax breaks to be uncovered by a professional that you didn’t know were there. After accounting for these tax breaks, you’ll most likely come out ahead despite paying for the services.
We hope that you found this article valuable! For more information related to financial planning, feel free to contact us!