Even though it’s still early to file your taxes, the sooner you crunch the numbers on your return, the better off you could be.
The IRS issued more than 111.8 million refunds for the 2018 tax year, with taxpayers receiving an average payment of $2,869.
This year could bring an even bigger windfall, for those who play their cards right by the April 15 filing deadline. Here are a few tax tips that could save you thousands:
1. Boost retirement contributions
Contributing as much as you can to your retirement — via, for example, an individual retirement account — is one of the best ways to reap a tax benefit.
“By contributing to an IRA, you directly reduce your taxable income and save for your retirement at the same time,” said Picnic Tax Founder Ryan McInnis.
Plus, you have until the April 15 tax deadline to set up and contribute to an IRA — and still have it count toward the 2019 tax year.
If you work for yourself, you can also make tax-deductible contributions to a Simplified Employee Pension account, or SEP IRA. The limit is up to 25% of net earnings, for a maximum contribution of $56,000 this year. You still have until April 15 to open and fund a SEP IRA and have it count on your return.
2. Fund a health savings account
Another way to reduce your taxable income is to contribute to health savings account, or HSA. (You need what’s known as a high-deductible health plan to do this). And, you have until the April deadline to do so for the 2019 tax year.
“Health savings account contributions can reduce your income eligible for taxation, as well as help with planning future medical costs,” said McInnis. “That’s always a good thing for your personal finances in the long run.”
- You can contribute up to $3,500 if you’re single.
- The limit goes to $7,000 for couples and families.
- You can add an extra $1,000, if you’re 55 or older.
HSAs are also a great way to grow your nest egg. The money you put in an HSA has triple tax advantages: The contributions go in pretax, you can withdraw it tax-free for qualified medical expenses and any money you don’t use can be invested and, as with an IRA or 401(k) plan, the gains are tax-deferred.
3. Collect tax credits
Tax credits are particularly valuable because they reduce your tax bill on a dollar-for-dollar basis.
Parents who use a daycare or childcare service may also be eligible for the federal Child and Dependent Care Tax Credit (CDCTC) of up to $3,000 for one child or up to $6,000 for two or more. (To claim the dependent care tax credit, reach out to your childcare provider for a tally of the costs you paid, as well as the provider’s tax ID.)
For taxpayers with low or modest incomes, the earned income tax credit can be as much as $6,557 for a family with children or up to $529 for taxpayers who do not have a qualifying child as long as they meet certain income limits and other requirements. The IRS estimates 4 out of 5 eligible taxpayers claim and get the EITC. Millions more miss out.
4. Dig for deductions
The Tax Cuts and Jobs Act raised the bar on who will itemize, as you now must surpass the 2019 standard deduction of $12,200 for singles or $24,400 for married filing jointly.
“Tax-filing strategies have been reduced partially because the standard deduction is about two times what it was beforehand,” said Eric Bronnenkant, the head of tax at financial company Betterment. “People used to have more ability to optimize their deductions.”
Still, if you had major surgery or went through a tough illness, the deduction for medical expenses is one of the few tax breaks currently available to individuals.
Medical expenses can be deducted if they were greater than 7.5% of your adjusted gross income last year. For example, if you made $50,000, you can deduct medical expenses if they were greater than $3,750.
In addition, if you donated to a good cause, you may be able to claim a charitable deduction. However, you must have made those donations by Dec. 31 and have appropriate acknowledgment letters from the charities to prove it.
In these cases, you’ll need to itemize on your tax return to get the deductions and you won’t know if you qualify until you tally up your expenses, but “It’s definitely worth the time to figure out if you are eligible,” Bronnenkant said.
And lastly, the tax overhaul created a new deduction for entrepreneurs.
The qualified business income or QBI deduction allows owners of “pass-through” entities, including S-corporations and partnerships, to deduct up to 20% of their qualified business income.
In this case, business owners with 2019 taxable income below $160,700 if single (or $321,400 if married and filing jointly) would benefit.
5. Check your withholding
To that end, the Treasury Department and the IRS have updated the withholding tables to reflect the tax law’s new standard deduction, as well as the personal exemptions that were eliminated and the limits on certain itemized deductions.
As a result, last year some filers wound up with smaller-than-expected refunds. Others ending up owing money.
(If you withhold far too much, you get a large refund the following year, but you’ve also given the government an interest-free loan. If you withhold too little, you take home more cash in your paycheck, but you may owe the IRS come April.)
Either way, taxpayers love refunds. Nearly two-thirds, or 63%, of those surveyed said they would rather get a refund than a bigger paycheck, even though it means paying more in taxes throughout the year, according to a new survey from Kiplinger’s Personal Finance magazine and Barclays US Consumer Bank.
If that’s the case, you may want to increase the amount of taxes withheld from your paycheck. Otherwise, file a new Form W-4 with your employer to decrease the amount you want to have withheld and have more money in your pocket every week.