Tax code is something that is continuously changing, and many taxpayers are often not comfortable planning for their financial future with a system that is always in flux. In 2017 new legislation was enacted that changed the standard deduction in many fields, as well as the bracketing for tax groups, and added additional credits and deductions too.
We asked several financial planners their best tax tips to help keep you as prepared as you can become the next tax season. Their advice is as follows:
1. Group Deductions
Hospital and drug bills make sense to be grouped, along with other deductible things like charity. This is due to the 2017 Tax Cuts and Jobs Act, which raised the standard deduction amount, which can make itemizing your deductions not as necessary as it was in the past. If a couple over 50 makes over $125,000 a year, their tax bracket is 24 percent, and they are given a standard deduction of $24,400. Taking in all their receipts, they believe they would be able to deduct 23,250 dollars, below the standard rate. Now, let’s say, of that amount, their donations to charity equaled 6000 dollars. It would make sense for them not to count those donations towards their 2019 taxes, as they are already below the standard deduction rate, and if they put off their charity until 2020, they can potentially itemize that then, as it might help exceed the standard deduction rate then.
2. Roth Retirement, Yes or No?
Roths and 401(k)s are standard for many places of employment. The money in your Roth account can accrue tax-free, but the contribution is taxed before you put it into the account. The tax breaks recently enacted are in effect through 2025, with higher rates kicking in after that date. In order to maximize your savings, it would make sense to put your money into an IRA or Roth now, paying the taxes on the money while the rate is still lower.
3. Save More with a Health Savings Account
Health Savings Accounts are charged the 7.65 percent payroll tax as you’d get on other accounts. Additionally, they are exempt from income tax, and can also possibly be deductible if the money is spent on certain qualified costs. Adding to that, some Health Savings Accounts also allow idle funds to be reinvested, making it a tax smart way to grow your money.
4. Start a Savings Account to Pay for Other Taxes
There are certain tax breaks specifically tailored for people to use towards their savings accounts, mostly through certain qualified plans through your job, though some personal plans also can qualify too. If you can contribute to your 401(k) or IRA at least 5000 dollars annually, that amount should not count towards your taxable income; the taxes due will be deferred until you start taking the money out of that account.
You can start an account specifically dedicated to tax-friendly charities with Advised Donor Funds, which are approved already by the IRS and through them you can get deductions on your taxes for the full value of the securities in the fund you’ve invested in. This helps you avoid paying taxes on accrued interest and gains and allows you to double down by getting an additional deduction once you donate the money in the account.
6. Open a Business Account and Keep Track of Everything
For those who are self-employed, opening an account just for what you make through your work might be more beneficial than mixing your profits with your personal account. It makes filing for taxes much more comfortable, as you won’t have to comb through all your transactions to get the ones you need for your business while making it easier to find additional transactions that could be eligible for possible deductions. It also keeps the IRS out of your personal account should you ever get audited.
7. Capital Gains Tax
When you are moving stocks at a gain, it is liable for taxes across the board. This tax percentage can vary depending on how long you’ve had the stock and how long it took to accrue a profit, up to a possible 37 percent for Federal taxes alone! While this might not be avoidable, knowing ahead of time the tax laws surrounding capital gains will help you plan for tax season better, and help you plan your wealth better too.