Tax Planning: 3 Ways To Ensure Maximum Benefits
Is it just me, or can you also sense the anxiety building up all around? The end of the year is upon us, which only means we are coming up on tax filing season! Fret not, friends, I have pulled together 3 quick tax savings tips that you can do TODAY in order to ensure maximum benefits! These are tips that I want you to consider, and act on as you close out this calendar year.
Are you withholding enough taxes on your paycheck?
Did you know that you can update your W-4 withholding throughout the year? In fact, it is your responsibility to ensure that the information you provided on your W-4 form to your employer is accurate and will withhold enough for your annual tax returns. You can review what your withholding should be by heading over to this app, the IRS has now updated with the Tax Cuts and Job Act new tax laws, in order to ensure that your withholding is accurate. In fact, the IRS recommends you do this “paycheck checkup” which can get pretty in-depth even for the self-employed individual! When I entered my information through the app, because my tax situation has changed drastically this year going from a W-2 employee to a Self-Employed individual, it said that I would owe about $1,521 in federal taxes come tax time, plus recommended the following to me:
“To minimize your potential penalty and the amount you may owe when you file your return, consider making an estimated tax payment by January 15 to cover the shortfall.”
But, tbh I will probably make more of a contribution into my retirement account in order to decrease the amount I owe in federal taxes! We’ll talk more about that later.
Remember that as you participate in this calculator it is only an estimate and it’s only as good as the data you put in it. Meaning if you put in bad data you’ll receive bad results. Also keep in mind that every person’s financial situation is different, so this estimate will be very specific to you. You’ll need a recent paycheck stub in order to complete this exercise. You can head over to this page for a quick FAQ on the withholding calculator. And for my self-employed friends, you’ll need all the info about your net profit to complete this calculation - especially if you plan to itemize your deductions.
Have you contributed to a charitable organization?
The next item to review is that of charitable giving. When I talk about charitable giving I'm talking about your financial gift to a nonprofit or a charity organization as one would normally give. However, one strategy I am hearing about is to bundle up your giving. With the new Tax Cuts and Job Act increasing the standard deduction, individuals may feel like it is not worth donating their money to an organization since the tax benefit appear to have diminished. Well, if you decide that your charitable giving for a combined 2 years is higher than the standard deduction then you’ll see tax savings this first year, and take the standard deduction the second year. You can find the chart below about the standard deduction on IRS Publication 501.
Table 6.Standard Deduction Chart for Most People
Are you maxing out your retirement accounts?
When it comes to your retirement account, I want you to consider contributing as much money as is feasible for you and your family. There are several different types of retirement accounts, including those sponsored by your employer. This can include a 401(k) a 403(b) or even your IRA account. For a 401(k) and 403(b) the contribution limit for 2019 is $19,000 while the contribution limit for 2020 is $19,500. These types of contributions are due by December 31, 2019. However, when it comes to an IRA account you can make your 2019 IRA contributions up until April 15, 2020. The contribution limit for 2019 and 2020 is $6,000.
Did you have a significant life change this year?
Was there a significant life change this year? Did you have a baby? Did you buy a house? Did you start a business? If any of these happened during 2019 I want you to make sure that you are keeping all your ducks in a row. I strongly urge you to reach out to a tax professional in order to get the maximum tax benefit (i.e. paying the lowest amount in taxes) that you can for this year!
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Disclaimer: I am not a Certified Public Accountant. Please speak with your CPA or Tax Accountant for your personal tax planning advice.