We recently covered the subject of financial resolutions to consider for the new year. You are probably thinking "Great, but I really need to work on filing my 2019 taxes." Let's dive in; are you working with your financial advisor to ensure you have considered how to reduce your taxable income and maximize your return? Have you considered maximizing your retirement plan contributions? Not only do you reduce your taxable income, but you are contributing to your future. If you are 50 or older, you could also make catch-up contributions.
Although retirement planning is one way to reduce taxable income, there are other options as well. Do you have a high deductible health plan? A high deductible is considered $1,350 for an individual or $2,700 for family coverage. Provided you are eligible to contribute, you could invest pre-tax dollars of either $3,500 for individual or $7,000 for family coverage into a healthcare savings account (HSA). HSA's are the only accounts that are "triple-tax free", meaning as long as they are used for healthcare costs, 1) contributions, 2) account growth and 3) withdrawals are not taxed.
Tax loss harvesting can help lower your taxable income up to $3,000. This technique involves selling a security that has experienced a loss. By realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns. Tax loss harvesting can be employed throughout the year.
Some employers offer flexible spending accounts (FSA) which allow individuals to make pre-tax contributions for dependent care expenses as well as certain qualifying medical expenses. Understanding the structure of this plan is important. First, individuals usually have to enroll during the employer's open enrollment period. Secondly, plans may be designed where contributions not used by the end of the plan year are lost; use it or lose it. According to care.com, nearly 50% of families spend in excess of 15% of their household income on child care and the costs for an one child exceeds $200/week. If you know what your projected monthly cost of care will be, contributing pre-tax to an FSA could be for you.
Do you itemize your deductions? If so, you are able to deduct your mortgage interest, charitable contributions, and medical expenses (under certain conditions). There is also the standard deduction to consider. The most recent chart from the IRS shows the following:
One consideration that is different from the prior items mentioned is converting IRA assets to a Roth IRA. This does not reduce your taxable income. In fact, it will raise your taxable income by the amount converted. However, this is a great tax time consideration for those who will not jump to the next tax bracket. Additionally, the funds grow tax-free because you have already paid!
Many of the considerations mentioned can carry exceptions that may apply to you. In order to ensure you are on the right track, it is always best to work with your financial advisor or CPA. And remember that tax filing deadline of April 15th!
* This article is for information purposes only and should not be considered tax advice. Please work with your tax planning professional to see if the situations above apply to you.