Making smart financial decisions before the year’s end can impact what you owe in April (and how much you’ll have to save for your other goals like retirement). Put these five tax saving strategies into effect before the end of the year.
1. Defer Your Income
You only pay taxes on income earned this year. If you’re self-employed, consider delaying billings until next year to help lower your upcoming tax bill. Deferring a year-end bonus could also reduce your tax burden. Remember, you’ll have to pay this tax eventually, so deferring your income is only smart if you expect to be in the same (or lower) tax bracket next year.
2. Ramp up Your Retirement Savings
New in 2019, you can put away more (tax-deferred) income into your retirement accounts. The new IRA contribution limits are $6,000. You can contribute an additional $1,000 in “catch up” contributions if you’re over age 50. Contribution limits for 401k plans have also increased. You can invest up to $19,000 (plus an additional $6,000 if you’re over 50). The more you invest into retirement now, the lower your tax bill will be in April.
If you reached age 70½ during this tax year, now is the time to check your IRA distributions. The IRS requires you to start taking regular minimum distributions from your traditional IRA account. Failing to withdraw sufficient funds will trigger a significant tax bill.
3. Squeeze in as Many Deductions as Possible
All charitable contributions and business expenses accrued before the year’s end count as tax deductions. Unreimbursed medical expenses are also tax deductible so long as they exceed 10 percent of your adjusted gross income. If you’re close to the threshold, schedule services like dental cleanings and eye exams, or purchase new eyeglasses to receive the full deduction. Remember to keep your receipts.
You can also prepay certain bills, including tuition and property taxes. Increasing your deductions helps decrease the amount you’ll pay in taxes.
4. Boost Your HSA
If you have a health savings account (HSA) and a high deductible health insurance plan, you can claim tax deductions for your contributions to your HSA. Contribution limits are $3,500 for individuals and $7,000 for families, a slight increase from 2018. You can contribute an extra $1,000 if you’re over 55. Contributions are made with pre-tax dollars and can be withdrawn tax-free for qualified medical expenses.
5. Contribute to Your FSA
Employer-sponsored flexible spending accounts (FSA) help cover out-of-pocket healthcare expenses. And while you can’t deduct FSA contributions, the accounts are funded with pre-tax dollars, which reduces your taxable income. The limits are $2,700 per year, per employer, which can be used to cover deductibles, co-payments, prescription medications and qualified medical equipment. Just be sure to double check your account balance and spend any unused funds before the new year.
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