Tax prep 101: 9 important tips to learn
Imagine this: more than 60% of Americans pay a pro to file their taxes every year. But if you decide to file for yourself, chances are that more than a few mistakes will be made every tax season.
New to the world of filing taxes? Simple tax mistakes can lead to big consequences.
Here are nine important tax prep tips to help you out!
1. Try “Bunching” Deductions
Not sure how to file taxes? We’re here to help. Ever since the Tax Cuts and Jobs Act passed in 2018, the threshold of standard tax deductions increased significantly. In fact, it more than doubled for individuals, households, and married couples alike.
Want to know how to get past these steep thresholds? Try “bunching” your tax deductions. In case you didn’t know, bunching is a strategic method where you plan out expenses by putting all of your deductibles into a single calendar year.
How can you achieve this? If you’d like to move forward in this direction, you can take advantage of bunching deductions by grouping annual charitable contributions and prepaid mortgage payments.
In addition to donating to charity, you can also accelerate tax deductions like:
• A doctor’s bill
• A property tax
• An income tax bill
Just make sure to itemize them using the bunching method next tax season!
2. Maximize Retirement Contributions
When it comes to tax preparation as a senior citizen, we highly recommend that you maximize your retirement contributions. That being said, this is the best way to decrease the amount of taxable income that you have. The result: a cheaper tax bill.
Can’t afford to make the maximum payment to your retirement fund? You’re not alone. If that’s the case, you should at least match the amount of money that your employer is placing into your retirement account. Think about it this way.
The money that your employer gives you is basically an instant return on your initial investment. It gets better. All of the cash in your retirement fund will become tax-free!
3. Take Out Required Minimum Distributions
Having a hard time filing taxes? If you’re over 70 years of age, we suggest that you take out your required minimum distribution by the close of 2019. But here’s the catch.
If you don’t remove your required minimum distribution on time, then you might get slapped with a pretty hefty tax penalty fee. Yes, that includes both IRAs and 401(k)s. For those that are unaware, required minimum distributions are based on the year-end value and the age of your retirement account.
Not sure if you’re taking your money out of the right account? Have no fear – you can always hire a tax pro to do the hard work for you.
In addition, you can combine your required minimum distribution with certain charitable donations as well. That way, you’ll be able to decrease your annual tax bill!
4. Participate Tax-Loss Harvesting
Are you sick and tired of tax filing incorrectly? One of the most essential things you need to remember is this: you’re required to pay income taxes on any financial gain you made in a single year. So, why not participate in tax-loss harvesting?
Let us explain. Tax-loss harvesting is a fantastic way to sell poor performing portfolios to counterbalance gains. Pro tip: you can claim several thousands of dollars in capital losses as long as they placed against income that you’re not investing.
This is crazy: tax-loss harvesting is actually a wonderful defense against unstable financial markets too. But here’s the kicker. Unfortunately, you won’t be able to purchase any substantially identical securities until a month later!
5. Use Annual Exclusion Gifts
Ever heard of annual exclusion gifts? Recently, the amount of tax-free money that you can give someone has been slightly raised. That means that you can give your loved one over $10,000 without ever having to pay the gift tax.
As if that’s not enough, parents can also gift their children large amounts of money by putting it straight into their child’s trust. Better yet, parents can even put their annual exclusion gifts into their kid’s 529 plan, or their college fund.
And get this: every single penny that you potentially put into your child’s college fund will remain 100% tax-free. Yes, you read that right. Your child won’t even get taxed when they take their annual exclusion gift out of their college fund!
6. Give Money to Charity
This one is a no-brainer: you can actually reduce your annual tax money by giving money to charity. But donating to a charitable organization isn’t just limited to cash donations. In fact, you can even donate household items to neighborhood community charities as well.
Afterward, all you have to do is make an itemized deduction during the next year’s tax season. Surprising, you can also write off simple deductions like:
• Lightly used clothes
• Functioning electronics
However, there is a limit placed on how much money you can donate per year. As a result, you can only donate up to half of your income to public charitable organizations per year. But if you want a tax break on your 2018 filings, you should make your donations toward the end of the year.
Plus, you need to save the receipt from your charitable donation too. At this point, you should also consider trying out the “bunching” strategy that we mentioned above. That’s because there’s no tax deduction for charitable donations on their own!
7. Straighten Out Healthcare Coverage
Guess what? Thanks to the 2017 Tax Cuts and Jobs Act, individuals will no longer be fined for not enrolling in health insurance coverage. Nevertheless, this law won’t become effective until next year.
Sadly, that means that you will still be penalized for lacking health insurance this upcoming tax season. What’s the penalty for this infraction?
For adults, you have to pay an extra couple of hundred bucks. Although you don’t need to prove that you’re insured, you should definitely keep this proof handy in case you need it!
8. Delay Your Income
Are you someone who looks forward to receiving an end-of-the-year bonus? If so, you may want to think about accepting it after the New Year. If your employer will let you delay your income, you’ll be able to put off any extra tax charges for the previous year.
But wait – there’s more. You should only take this plan of action if you think it will put you in a similar or lower income tax bracket the following year. To avoid any financial mixups, you can always accelerate your income into the next year to pay reduced taxes in the future!
9. Review Your Beneficiaries
Even though reviewing your beneficiaries won’t make much of an impact now, it can affect the income taxes of your family in the distant future. So, make sure that you overlook your list of beneficiaries before the year is over.
Have any huge life changes coming up? If that’s the case, then you might want to think about refreshing your beneficiaries list. Because later on in life, this step will help reduce any income taxes your beneficiaries have to pay on your financial assets.
Don’t want to take any chances? Then it’s super important to line up your beneficiary designations before anything unexpected occurs. As a result, your family will see a huge effect on the amount of tax money they’ll have to pay.
On the hunt for bank products for tax preparers? You can’t go wrong with doing your research first!
Tax Prep Doesn’t Have to Give You a Headache
Still not sure how to file taxes? We’ve got you covered. Here’s the deal: with our handy tax guide, tax prep doesn’t have to give you a headache.
From bunching deductions and maximizing retirement contributions to taking out your required minimum distributions and participating in tax-loss harvesting, you’re guaranteed to save a ton of money of your tax bill next year.
Need to drastically reduce your taxable income? Take advantage of annual exclusion gifts for your loved ones. Dying to help out the needy? Make a difference in the world (and your bank account) by giving money to charity.
On top of that, you can always straighten out your health care coverage. In addition, delaying your income and reviewing your beneficiaries is a smart way to take care of your financial future.
So, what are you waiting for? Head to your local tax preparer and make the necessary changes now. You won’t regret it!
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