“…but in this world nothing can be said to be certain, except death and taxes.”
― Benjamin Franklin
As the leaves fall and the weather cools down, it’s time to make moves that can reduce your 2019 taxes or increase next year’s refund. Here are 6 tips we share with our clients to make their personal or business tax return less painful.
1. Defer your income
Figure out your adjusted gross income for 2019 and 2020. This will help you identify your tax bracket for both years. If it looks like you’ll be in the same or lower tax bracket next year, then consider shifting some of your income to the lower income year. This can be done by asking your employer to defer a year-end bonus to next calendar year. If you’re self-employed, consider delaying billing so you get paid in the new tax year. Whether you are working for someone else or a freelancer/consultant, you can also defer income by taking capital gains in 2020 instead of in 2019. If it looks like you’ll be in a higher tax bracket next year, then take your company bonus this year or, for consultants, make sure you get this year’s billing out and paid for before you’re kissing someone under the mistletoe.
2. Last-minute tax deductions
In addition to the advice listed in Tip #1, an effective way to reduce taxes is to take advantage of tax deductions. If you own a business, consider making tax-deductible expenses this year on things like equipment and supplies.
You can also contribute cash or goods to a charity. Make sure that you get a receipt for any contribution, no matter what the amount. If you donate an asset that you’ve owned for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.
Decide if it’s better to itemize your deductions vs. claiming the standard deduction. According to the IRS, about 75% of taxpayers take the standard deduction. But this isn’t necessarily the best strategy. If your qualifying expenses exceed the standard deduction, which in 2019 is $12,200 if you are single, or $24,400 if you’re married filing jointly, then you likely should maximize your deductions and itemize. Postpone your donation if you think you’ll need the deduction more in the next tax year.
3. Beware of the Alternative Minimum Tax (AMT)
With the new higher income limits for individuals exposed to the Alternative Minimum Tax, more taxpayers will have the opportunity to recapture the AMT paid in prior years. Ask your accountant to calculate your prior years’ AMT credit now so you can reduce your withholding and enjoy the benefit early.
The AMT is figured separately from your regular tax liability and with different rules. You have to pay whichever tax bill is higher. This is a year-end issue because certain expenses that are deductible under the regular rules—and therefore candidates for accelerated payments—are not deductible under the AMT.
4. Reevaluate your investments
Sell stocks that may produce a loss. Taxpayers can deduct up to $3,000 ($1,500 for married filing separately) of their excess losses, which reduces overall income. If you sold stocks this year that resulted in a gain, selling stocks that produce a loss will offset the gain.
If you have more than $3,000 in excess loss, it can be carried over to the next year. You can use it then to offset any 2020 gains, plus up to $3,000 of other income. You can continue to carry over losses year after year for as long as you live.
5. Up the Ante on Your Retirement Account
One of the best investments is a tax-deferred retirement account since they compound over time free of taxes and often employers match contributions. It also reduces your taxable yearly income. If you’re self-employed, consider a Keogh plan. A Keogh plan must be set up by December 31 but you can still make contributions until April 15, 2020 (or October 15, 2020 if you get an extension to file).
Make sure that you’re putting in the maximum amount of money allowed ($19,000 for 2019, $25,000 if you are age 50 or over). If that amount isn’t realistic, try to contribute at least the amount that will be matched by employer contributions.
6. Don’t Forget That Flexible Spending Account
You’ve been diligently socking away money in your FSA. That’s great. But in the next few months, make sure that you review that account to determine if the account balance can be used before the plan’s deadline. Funds not used by the account deadline will be lost.
It is one of life’s certainties that we must pay taxes. But we do have control over how much we pay. Now is the time to take stock of what you can do to lessen the burden and keep more of your hard-earned cash.
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