It’s the new year and you are still enjoying the glow from the holiday season, when mid-January you start receiving 2019’s tax forms. Don’t stress, just a little preparation starting now can go a long way in saving you time, money, and preparation for the following tax season. Even though 2019 has ended, there are still options for getting the most from tax filing season.
Set aside time to plan.
Get all of your documents together. You will want to have your tax records from your employer(s) as well as from your banks, brokerage firms, and others with whom you do business. These can help you have a better understanding of your current tax situation. Also, you can use the previous years’ tax return as a guide to keep you from missing any important information. Another option is to have your taxes prepared and filed for you by a tax professional, such as a certified public accountant. Ultimately, having your tax documents all together, even when speaking with a financial advisor about your tax strategies, can save you time and money. John Clawson is an experienced financial consultant in Winchester, VA who offers experience in evaluating most any financial situation and steering clients in the pursuit of their financial goals.
Two things to help lower taxes after December 31st.
Most tax saving moves have a deadline at the end of the year, December 31st. However, you are still able to contribute to some retirement accounts up until April 15th of the new year. Contributing can help lower your tax bill this year and your contributions will have the opportunity to compound as tax-deferred income.
Another option to help lower your taxes after the end of the year is to make any last-minute tax payments. If you didn’t pay enough to the IRS for the year, you may be staring at a big tax bill, plus any interest or penalties. Making these payments now can help lower your taxes once you file.
Decide on your deduction options.
- Standard tax deductions. This deduction allows individuals and companies to subtract a certain set of expenses from their taxable income. This in turn reduces the overall tax bill.
- Itemized deductions. If you made large charitable donations, paid mortgage interest and property taxes on your home, had large amounts of out-of-pocket medical expenses, or experienced uninsured loss from a natural disaster, you might want to consider itemizing.
You will want to run the numbers for both standard deduction and itemized deductions to see which option gives you a bigger deduction. Taking the standard deduction is much simpler when filing, but it could cost you more money. Also, when looking into your deductions options; it is important to consider whether you might be subject to the alternative minimum tax (AMT). This system is an alternative to the standard income tax and is triggered when a taxpayer makes more than the exemption and it effectively cancels a number of itemized deductions.
You should also be aware of the net investment income tax (NIIT) when preparing to file. If you have received investment income throughout the year or received money from an estate or trust, you might be subject to the NIIT. This applies to your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds the filing status-based thresholds that the IRS put in place. For a full list of who is subject to this tax the IRS provides resources on-line to help guide you. Also, if you are a local to the Winchester, VA area, John Clawson is a financial advisor who can provide excellent resources for you during tax season.
Decide how you want your tax refund.
Here are a few options for how you can receive and utilize your tax refund once you have filed:
- You can receive the refund by check or a deposit directly into your checking or savings account. Typically, you will receive your refund faster if you e-file and have your refund deposited directly to your bank.
- Apply some or all of the refund towards next year’s taxes.
- You can contribute some or all of your refund to accounts such as:
- IRA’s
- Health Savings account
- Education savings account
This is another area where working with a financial planner can help you make decisions about what to do with your refund.
Being prepared for the next tax season.
There are also a few things you can start doing now to prepare for 2020’s tax season.
- Keep your return from this year, as well as all documents, and receipts throughout this year together for easy access for the next tax season.
- If possible, make payments on your deductible expenses (medical expenses, qualifying interest, and state taxes) before the end of this year. It could make a difference on your 2020 return.
- Again, be aware of the AMT and NIIT throughout the year, but especially when considering any year end moves to help lower your taxes.
- Increase your withholding to cover a tax shortfall if it looks like you are going to owe federal income tax for the year. Especially, if you think you might be subject to an estimated tax penalty.
- As stated earlier, you will also want to consider contributing up to the maximum amount allowed on any retirement savings (such as a traditional IRA or 401(k)) by the end of the year.
Most of all, get help if you need it. Working with a tax professional to evaluate your situation can help you make decisions throughout the year that can positively affect your tax returns, as well as help to determine if there are any year end moves that will help reduce your taxes.
*Shenandoah Valley Financial Services is located in the city of Winchester in Frederick County, VA. We serve as financial advisors to clients in the Mid-Atlantic Region primarily in the states of VA, MD, DC, FL, NC, SC, PA, and WV.