The tax year is coming to a close. But before the year ends, consider these ten tax strategies that might be able to maximize how much money you can keep from Uncle Sam.
Tax Tip #1: Decide Between Itemizing or Taking the Standard Tax Deduction
Because of recent changes to the tax code, the standard deduction is now larger. So those who used to itemize will need to reassess whether this strategy continues to pay off. For some, it might make more sense both financially and time-wise to simply take the standard deduction.
Tax Tip #2: Take Full Advantage of Your 401(k)
One of the biggest benefits of a 401(k) is the fact that pre-tax contributions are tax-deferred. You’ll eventually have to pay taxes on these contributions, but you have the option of deciding when to pay those taxes by choosing when to make withdrawals from the 401(k). For most 401(k) investors, these withdrawals will be well into the future.
Tax Tip #3: Harvest Your Investment Losses
When an investor loses money on a sale of stocks or other securities, those losses can be reduced due to their tax deductibility (up to a point). Depending on how well (or badly) you’re doing with your investments, it might make sense to sell some securities that are in the red and use those losses to offset some of your gains. But there are two things to keep in mind.
First, there is something called the “wash rule,” which will negate the tax benefit if you quickly buy the security back after taking advantage of the deduction. Second, don’t let this desire for a tax benefit convince you to make a poor investment decision.
Tax Tip #4: Make Use of Your Flexible Spending Account
If you have a flexible spending account, unspent benefits will usually disappear at the end of the calendar year. Be sure to take advantage of this money by taking an extra visit to your primary care physician, eye doctor or dentist.
Tax Tip #5: Consult With a Tax Professional
Consider making an appointment with a tax professional, such as a CPA. They can help develop an end of year strategy to maximize your financial situation. A few hundred dollars and an hour of your time could result in tens of thousands of dollars in tax savings.
Tax Tip #6: Determine Your Tax Bracket
It’s important to know what tax bracket you’ll be in for 2019, as well as what bracket you might be in 2020. For most people, these tax brackets will be the same. But for others, there might be significant differences, such as following a job change or retirement. Knowing this information can be important. For instance, if you’re going to be in a far lower tax bracket next year, it might be better to shift some of your income from 2019 into 2020.
Tax Tip #7: Watch Out for the AMT
The AMT, or alternative minimum tax, is designed to prevent wealthy people from paying too little tax. Today, it’s affecting more and more middle-class taxpayers. It’s critical to know if the AMT affects you because certain expenses (such as state and local income taxes) are not deductible under the AMT.
Tax Tip #8: Make an Extra Mortgage Payment
For some taxpayers, it’s possible to make a 13th monthly mortgage payment for the 2019 tax year. This allows for a greater mortgage interest tax deduction in 2019. This strategy can often be applied to state tax payments (except under the AMT).
Tax Tip #9: Donate to a Charity
If you know you’re going to itemize your tax deductions this year, and you’re nowhere near close to hitting the charitable deduction limit, think about making a donation to a qualified charity. While you won’t get back your donation dollar for dollar, you’ll save a little bit on your taxes while making a positive difference in the world.
Tax Tip #10: Start a 529 Savings Plan
Contributions to a 529 savings plan aren’t tax deductible for the donor. But the principle can grow with tax-deferred status and the distributions will be exempt from taxation when spent on the beneficiary’s college costs.