THEY ADD UP
For most taxpayers, the immediate focus in the new year is probably getting 2018 materials together ahead of the April rush. But it also makes sense to start preparing now for the 2019 tax year. These tips can help individuals and small-business owners lower their tax burden next year, avoid audits, and feel a little better about the whole process. The tax law signed in 2017 may also make this a good year to seek help from a professional when making tax decisions.
Although it's nice to get a big refund after sending in a tax return, it's even better to optimize tax withholding and get a little more money in every paycheck. The Internal Revenue Service has a withholding calculator you can use to figure out the right amount of income tax to have withheld from your paychecks.
RE-EVALUATE RETIREMENT PLAN CONTRIBUTIONS
You might want to increase your retirement contribution rate, helping grow your retirement fund while also lowering your tax bill. Investments in a tax-advantaged account such as a traditional IRA, 401(k), and 403(b) grow on a tax-deferred basis and can be withdrawn without penalty starting at age 59½.
People spending time and money pursuing higher education and enrolled in post-secondary school, such as a two- or four-year college or vocational program, may be eligible for a Lifetime Learning Credit worth up to $2,000 a year. You also may be able to claim the credit if your spouse or a dependent has eligible higher education expenses.
REPORT LIFE-CHANGING EVENTS
Michael Raanan, a former IRS agent, reminds taxpayers that a major "life event" may affect the amount of income tax withheld from their pay. After a marriage or the birth of a child, for example, you should submit a new Form W-4 to your employer.
PAY ESTIMATED TAXES ON TIME
If you earn money on the side through a freelance job, your own business, or even from interest or rental income, remember to pay estimated federal and (when applicable) state taxes four times a year. Failure to do so can result in costly penalties for those who expect to owe at least $1,000 in taxes.
MAINTAIN SEPARATE BUSINESS ACCOUNTS
Anyone starting a business should consider opening separate business checking, savings, and credit card accounts. Keeping finances separate could make it easier identify and organize business expenses when filing next year's tax returns and help provide real-time information throughout the year.
BUY HEALTH INSURANCE
The new tax reform bill repeals the individual mandate in 2019, so there's no penalty for not carrying health insurance. However, some people may be able to deduct health insurance expenses on their taxes. You can deduct only allowable medical expenses that exceed 7.5 percent of your adjusted gross income, and you must have enough deductions to itemize an amount that's higher than the standard deduction for this to be worthwhile. Also, you can deduct only insurance premiums you pay with after-tax money from your own pocket.
While the new tax law reduces the number of people for whom it makes sense to itemize deductions, taxpayers who do itemize should track how far and when they drive for medical, volunteer, or nonprofit activities. Even short trips to the local drugstore to pick up a prescription or to a local charity to drop off a donation can add up to a tax deduction. Self-employed individuals can write off many work-related trips against their business income.
RECORD OTHER BUSINESS EXPENSES
Make notes and keep documentation for everything. It's important to have proof of events and expenses if needed, and sometimes it can be hard to remember specifics. This is particularly important for events that occur early in the year, which may be long forgotten when it comes time to file 2019 returns next year.