WAYS TO REDUCE THE IMPACT OF YOUR INCOME
Defer more income into retirement.
Contributing to a company-sponsored retirement plan and/or traditional IRA is a great way to lower your taxable income. 401(K) contributions are deducted from your income before taxes. For 2019 you can put up to $19,000 into your 401(K), $6,000 into your IRA (subject to income limitations), and more if you are over 50. You save on taxes now, shelter the money from tax as it grows, and contribute to your retirement wealth.
Start a Roth IRA.
Your present income tax will not be reduced by a Roth contribution, but if you follow the rules, your Roth contribution of up to $6,000 ($7,000 if over 50) and its earnings will be removed from taxation forever.
Start a college plan.
- 529 plans are college saving programs set up by states. They will not save current tax dollars, but the money contributed saves future dollars because they grow tax-free and can be cashed in with no tax liability when used for qualifying post-secondary school expenses. These plans were made permanent by Congress, so their future tax-free status is assured. Check with your Martin Accounting Services tax preparer to see if your state offers a tax deduction for contributions.
- Coverdell accounts are self-directed education accounts. Contributions to these are more limited, but they grow tax-free, and proceeds can be used for education at any level (kindergarten to college).
- Contribute money into your Roth IRA now for future college costs. Your original contributions can be withdrawn tax-free for anything (only the earnings withdrawn are subject to tax & penalty).
MAXIMIZE YOUR ITEMIZED DEDUCTIONS
Is itemizing worth it? Did you itemize your deductions last year? Check out Schedule A. For 2019, the standard deduction is as follows: Married filing joint gets $24,400, head of household gets $18,350, and single taxpayers get $12,200. Many more taxpayers are finding it difficult to itemize. If you fall into this situation, you may benefit from "bunching. "The "bunching" technique involves itemizing every other year by doubling up on itemized deductions such as donations and using the standard deduction in the next year. Remember to document those donations and save receipts.
HSA AND FSA
If you need medical insurance, start an HSA.
You must be under 65, covered by an HSA compatible high deductible health plan, and have no other insurance to set up an HSA. If this is you, you can put up to $3,500 (single) and $7,000 (family) into the HSA account and deduct the payment. You get a medical deduction without having to itemize. Withdrawals from the HSA are not taxed if used for medical expenses.
Use your flexible spending account.
A medical spending account is funded with pre-tax dollars, so you reduce the impact of your income. You save income tax and Social Security/Medicare dollars with each contribution. If you haven't signed up for this tax-saving tool, you should consider doing so. A review of last year's medical expenditures can help you determine the amount you set aside. You can set up to $2,700 a year in a pre-tax account for 2019.
If you have children in childcare, you can set aside up to $5,000 in a pre-tax childcare account. This money also escapes both income and Social Security/Medicare taxes, and in most cases, provides better tax savings than the Child Care Credit.