Since another tax season is rapidly approaching, millions of Americans are slowly turning to their annual paystubs as they begin making some preliminary plans about filing. If you have not had a chance to do so, you should probably consider getting started. After all, once the calendar year is over, you will only have a few months to gather your paperwork, visit with your accountant, help fill out all the forms, and submit them to the IRS.
The most important thing that you should be thinking about during this time is making a basic tax strategy. In other words, start analyzing some of your income to see what types of taxes you will owe, look into your expenses, and think about the forms that you may need to file. Then, find some of the most noticeable changes to your current year’s earnings and status as opposed to the ones from the last year. Doing so will help you pinpoint the areas of concern that you may need to showcase additional evidence for. To better understand the process, however, use the following tax planning guide to answer some of the key questions.
Double-Check Your Withholdings
Before even getting started with the planning, you have to take a step back and look into your federal withholdings. According to Regan Rohl, who is a senior financial advisor for Wells Fargo, this is a line item that will show on your paystub if you are a W-2 employee who works for someone else. It represents the money that your employer has taken out of your salary and sent to the federal government. Well, if you have a track record of getting enormous refunds, it may be time to think about changing your withholding allowances. These represent basic deductions that you claim on Form W-4 when you first start working somewhere. For instance, if you are a single individual living alone, you will usually only claim one allowance.
The problem with that approach, however, is that sometimes people do not claim enough allowance and end up having too much money withheld from them. Consequently, they receive an enormous tax refund in the following year. Since giving money to the government this way is an interest-free loan, you should always look to claim as many allowances as you need to keep your refunds at a minimum. Doing so will increase your paychecks as you will start getting the money that you used to send to the IRS in real-time.
Another crucial element of tax planning boils down to retirement consideration. When you have a 401(k) plan, the contributions that you make to it are tax-deductible to a certain point. So, if you earn $50,000 in gross income and spend $2,000 on your 401(k) investments, you may only have to pay tax on $48,000, hypothetically. Additionally, investing money into your retirement is the most basic principle of a healthy financial standing. Thus, try to max out your retirement contributions every single year as doing so will result in the greatest amount of tax benefits.
Consider Using Your Annual Gift Exclusion
Since the IRS has no interest in taxing every single transaction that happens between parties, whether they are related or not, they allow an annual gift exclusion to each taxpayer. In 2019, that figure will be $15,000, which is the same as it was in 2018. This can be a great incentive for you to start transferring some of your wealth to others. For example, if you have a lot of money that you want to give to someone, doing so at once will cause them to have reportable income. If, however, you give it to them in payments of $15,000 per year, the IRS will not be able to tax anyone.
Work on a Filing Schedule
While you are working on figuring out the most common concerns about your taxes, Regan Rohl advises that you also develop a schedule that will keep you on track with the filling process. A great starting point would be booking a meeting with your CPA to go over your prior year’s earnings and changes during January. Then, you will most likely get some time to gather the paperwork that the accountant will need to file your taxes. Afterward, you should dedicate the month of March to working with your CPA to fill out the forms and relevant schedules. If you are going to be filing without any professional help, try to get everything filled out and submitted as soon as you have access to your W-2s, 1099s, and any other forms that you need.
Think About Itemizing
When the “Tax Cuts and Jobs Act” was passed in 2017, the value of itemizing decreased. In the past, people used to be able to do so whenever they had more expenses than a relatively low standard deduction. Nowadays, however, since the personal exemption does not exist anymore, every taxpayer gets a base standard deduction of $12,200, or $24,400 for married couples. In most cases, that amount is more than one can accumulate through itemization, which is why it does not pay off. Nonetheless, you should always make a list of every single expense that is eligible for itemization and find the underlying total. If it exceeds $12,200, which applies to single filers, or $24,400, which applies to married fillers, you should fill out a Schedule A.
Consider Delaying Investment Sales Until Your Capital Rates Kick In
Ultimately, as you are approaching the year’s end, think about delaying the sale of some of your investments to take advantage of the capital gain rates later on. For example, if you sell stocks that you held for less than a year, they will be taxed at your ordinary rates that can go up to 37%. Once you wait a year, however, they become long-term capital gains that cannot be taxed at a rate exceeding 20%.