5 Steps to Kickstart Your 2019 Tax Strategy
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Whether you are among those who made it over the April 15 finish line to file your 2018 tax return on time, or you filed for an extension, your post-tax routine should include preparation for 2019 taxes. Having a strategy and executing it will help you avoid missed opportunities, and relieve the stress of tax preparation later on. Here are five steps you can take before April 15, 2020 to simplify your tax filing preparations and maximize tax reduction opportunities.
Step One: Project your anticipated income for the coming year.
Keeping an on-going tally of your income will help you determine your tax liability and develop a strategy to reduce it before the time comes. If you are employed, your payroll stubs are a wealth of information regarding salary and deductions. If you are self-employed, you can use your 2018 income to gauge 2019: Do you expect a big order or project, or have you lost a client? Do you have potential prospects that might bring in more revenue?
Step Two: Track your deductible expenses throughout the year.
Start by taking a quick inventory of the expenses you used as tax deductions in 2018, then create a method of tracking and retaining expense records for 2019.
For example, you might sort receipts by the type of deductible expense: medical, property taxes, charitable contributions, car odometer readings for business travel. Other variables such as anticipated life changes in 2019 (marriage, birth or adoption of a child), life enhancements (purchasing an electric vehicle or solar panels for your house), and health insurance changes could have a dramatic effect on your tax strategy.
Step Three: Set aside money to pay your 2019 tax liability.
Meet with your tax advisor to estimate your likely tax liability in 2019. Be aware of the amounts being withheld from your paychecks. Self-employed individuals: determine how much you should set aside for taxes. With the changes in tax law and deductions, taxpayers need to evaluate whether the amounts being withheld from paychecks or amount being set aside are sufficient to meet their tax liability.
You can read about tax law changes in IRS Publication 5307 and use the IRS withholding calculator to figure out your projected tax liability for the coming year.
The sooner you estimate your tax liability, the better chance you have of covering it through withholding or quarterly estimates. However, if you make this calculation later in the year and realize that you have not been withholding enough, you can send electronic payments directly to the IRS at any point during the year. This will help reduce/eliminate any interest or penalties you may owe.
Step Four: Participate in programs that could reduce your tax liability.
Some taxpayers overlook tax-advantaged programs offered by employers. For example, enrolling in a High Deductible Health Plan (HDHP) qualifies you to make contributions to a Health Savings Account, or HSA. The money you put into an HSA is a straight-line deduction on your personal tax return. Some employers also match HSA contributions through their cafeteria plans. Instead of directly paying medical expenses, you may want to consider contributing to an HSA and using that money to pay your medical bills.
Step Five: Contribute to tax-advantaged retirement savings accounts.
To the extent that you are able, increase your contributions to your employer’s retirement plan such as a 401(k), 403(b), or governmental 457(b) plan. Making contributions to these plans will reduce your federal and state taxable income. They do not however, reduce your Social Security liability, FICA, and FUTA deductions.
As an individual, you can also contribute to an IRA. Contributions to a Traditional IRA could reduce your taxable income and possibly reduce your tax liability through the Saver’s Tax Credit.
If you have a small business or are self-employed, consider establishing and contributing to an employer-sponsored plan such as a Simplified Employee Pension Plan (SEP), Savings Incentive Match Plan (SIMPLE) or an Individual 401(k) plan. Contributions to the aforementioned plans are tax deductible. The Department of Labor encourages small businesses to establish an employer-sponsored plan and has a brochure describing the different employer-sponsored plans for small businesses. Talk with your tax advisor about the type of plan that best suits your situation or read about the plans in the IRS publication 560.
Avoid tax season stress and start planning early this year! While you’re at it, you can open an Entrust self-directed IRA online in under 10 minutes and start taking advantage of the tax benefits today.