Taxes are a significant setback and are paid from hard-earned money. No one enjoys paying or filing them as a lot of paperwork is involved, and erroneous mistakes incur high costs if an individual offers incorrect information, underpays or owes penalties.
They can be stressful and complicated, and people could waste their time and energy if proper planning is not embraced. The good news is that the following tax planning tips go a long way in ensuring proper paperwork is done, and tax costs are kept low.
Good Record Keeping
Accurate records make it easy for one to file taxes. For a majority, the greatest hassle while filing taxes is having all the documentation together.
For this reason, you need to adopt a filing system that heightens the organization of crucial documents such as tax forms and pay stubs.
Keeping a tab on expenses to write off is rather essential for self-employed persons as they plan to reduce some costs year over year (yoy)
How can one organize records?
- Make a hard copy of a tax checklist to assist in gathering tax documents required to complete the tax return.
- Store securely all the information that comes in the email from the beginning of the year. Tip: Do not discard any tax-related documents, even if they do not appear crucial.
- Gather information and receipts that have piled during the year.
- Group related documents together, organizing them in different file folders.
- Ensure you have full knowledge of prices for funds or stocks sold. If not, call the broker before preparing the tax return.
Embrace the tools provided by the Internal Revenue Service (IRS)
There are vital decisions made while filing taxes – whether to claim or itemize a standard deduction, where your child qualifies as a dependent, and which filing status is the right one.
The decisions made on these issues can influence the amount paid in taxes. Fortunately, the IRS offers tools that foster the right choices as it provides information on the itemized versus the standard deduction.
If one can deduct more by claiming deductions for certain things such as paying state and local taxes as well as paying a mortgage, then itemizing should ensue. If not, claiming the standard deduction is a better option for maximization of savings.
Take advantage of 401(k)s, HSAs, and IRAs
Retirement saving strategies such as 401(k)s, health savings account (HSA) and IRAs allow one set aside future funds as well as save money for the present times. Self-employed persons are also eligible to open a Solo 401(k).
This year, persons under 50 can contribute up to $19,000 to a 401(k) and $6,000 to an IRA. These limits can increase to $25,000 and $7,000 respectively for persons over 50. Besides, contribution to a health savings account is possible for persons who have a qualifying high-deductible health plan.
Once contributions commence, it is vital that the retirement age is attained for withdraws to begin; otherwise, a 10% penalty is incurred. On the contrary, HSA funds are withdrawn tax-free as and when the need arises.
Contribution limits change annually for these three accounts to achieve substantial tax savings while also creating a possibility to access the money in the future.
Be up-to-date with changes in tax code
Last year’s overhaul of the tax code led to massive transformations that could affect you presently and in the future. For that reason, being informed of those changes can enable you to make wise decisions that could save your finances or prevent you from encountering financial hardships.
For instance, the adjustment lowered a significant fraction of individual tax categories in order for employees to obtain higher amounts in their salaries.
Together with this reform, the IRS gave out different withholding tables that employees need to follow.
In the event that you don’t analyze and amend your withholding, you will run the risk of underpaying your taxes and having IRS arrears when you file the next return, therefore, pay attention to such and other changes.
Find tax-beneficial channels for healthcare purposes
Most probably, healthcare is among your greatest expenses. With this in mind, it can be quite affordable for you if you started saving for this significant need using a tax-advantaged method.
To begin with, you could open a flexible spending account, which, in 2019, permits you to reserve as much as $2,700 to cater to eligible medical expenses, such as prescriptions and physician’s visits.
Consider moving to a tax-friendly region
In case you do not know, the new tax regulation has placed a deduction limit of $10,000 on local and state taxes for 2018 and thereafter. The restriction will have a severe influence on the tax circumstances of individuals who reside in states that involve high taxes.
If you are contemplating on relocating in 2019, or if this alternative is available, you might want to take into account low tax states, for instance, Alaska, Nevada, Tennessee, Washington, Wyoming, Texas, New Hampshire, Florida, and South Dakota.
This could be a drastic strategy; however, if you are planning to move and you are in control of where to go, lower tax areas are better choices as provided by the new tax policy.
Exploit expanded prospects with 529 plans
The new tax regulation also has other good news. Under the former law, proceeds from 529 savings plans were only used for costs related to college payment. Nonetheless, from the onset of 2018, the plan was enlarged to permit the use of as much as $10,000 in 529 plan funds for tuition payment in grades K to 12.
Nobody would wish to pay more taxes than required or encounter difficulties in the filing procedure. Through these tips — and some luck, you can avoid both circumstances in 2019 and beyond.
The impact of any prospective adverse outcomes can be minimized substantially through tactics such as increasing withholding, establishing tax estimates or implementing tax strategies in 2019 as it is a year where tax planning is quite essential.
After filing 2018 tax returns, you could have learned that there were tax insights and benefit you missed. Do not let that happen again. The tips discussed above can save you a great deal.