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This year, don’t just cram your completed 2019 income tax return into a drawer. Use it as a guideline to hands you save more money.
Oct. 15 is the deadline for taxpayers who sought additional time to complete the prior year’s profit. Bear in mind, the taxes you owed for 2019 should have been paid by July 15 — the new deadline the Moneys Department set due to the coronavirus pandemic.
About 12 million taxpayers asked the taxman for more time to get their paperwork in, agreeing to data from the IRS.
You probably don’t want to take another look at your return after you’ve submitted it, but take a second to review the outcome with your tax professional or your financial advisor.
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It could save you a few extra bucks next year and beyond.
“The way I look at it, the takings is a checklist for you,” said CPA Paula McMillan, a member of the American Institute of CPAs’ personal financial specialist committee. McMillan is also a corroborated financial planner and wealth management advisor with the Stearns Financial Group in Greensboro, North Carolina.
“Your receipts is being brought together on your tax return, so it’s a great place to start,” she said. “What’s just as important are the verifying documents you have with your tax return.”
Here are three ways your tax return can help you save prosperous forward:
1. Eye your Form W-2
Luis Alvarez
If you’re an employee receiving wages, your employer is required to send you those delegates on Form W-2 every January.
Not only does this form give you the inside line on your wages, but it also disperses out the details on the amount of income tax you had withheld from your pay and the amount of money you contribute to your 401(k) plan at stir.
The W-2 also provides details on contributions to health savings accounts at work.
These accounts work alongside a high-deductible trim plan and bring a triple-tax advantage: Contributions are made pretax, while earnings accumulate tax-free. Money in an HSA can be adapted to tax-free to cover qualified medical costs.
Take a look at your Form W-2 and work with your economic advisor or tax professional to determine whether it makes more sense to stash more cash into your retirement accounts or self-styled cafeteria plan benefits, like your HSA.
The benefit is twofold: You’re banking for future expenses, but you’re also trimming your tax tab in the immediate term. That’s because contributions to these accounts lower your taxable income.
Deferrals into your HSA via payroll cause the added benefit of avoiding Social Security and Medicare taxes.
“How much are people contributing to cafeteria plans and their 401(k)s?” McMillan quizzed. “Get that match if you have it available.”
2. Review your withholding
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Review your return to see where you handle on income taxes withheld.
You’ll see this reported on your Form W-2 if you’re an employee. However, if you’re an independent contractor, you’ll be expected to obtain quarterly estimated payments.
Fall short, and the IRS will hit you with penalties and interest.
“The first thing I would look at was whether I was subjected to some kindly of underpayment penalty,” said Eric Bronnenkant, CPA and head of tax at Betterment.
You want to get it closer to the accurate withholding versus overpaying excessively.
Paula McMillan
property management advisor at Stearns Financial Group
Generally, to avoid a penalty, you have to pay at least 90% of the tax owed for the stream year or 100% of the tax owed for the prior year (this goes up to 110% if your adjusted gross income outreached $150,000 in 2019).
Paying the appropriate amount of tax can make the difference between owing the IRS or receiving a refund from overpayment.
In a achieve world, you might want to aim for the middle. “You want to get it closer to the accurate withholding versus overpaying excessively,” McMillan implied.
3. Consider charitable donations
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The Tax Cuts and Jobs Act, which fitted into effect in 2018, roughly doubled the standard deduction, which resulted in fewer people itemizing tax write-offs on their reappears.
For individuals who have enough itemized deductions that they fall just short of the standard deduction of $12,400 for celibates in 2020 ($24,800 for married filing jointly), it might make sense to consider bunching their charitable giving.
That is, you fill multiple years’ worth of charitable donations into one year so that you can itemize on your tax return.
“You would takings the standard deduction in one year, but itemize in another year,” said Bronnenkant of Betterment.
Donors over age 70½ who smooth want to give but are unable to itemize may want to consider a qualified charitable distribution out of an individual retirement account, McMillan claimed.
In this case, the custodian holding the account transfers money to a charity.
This has been a tactic for older savers who need to meet their annual required minimum distributions, but don’t need the money and want to avoid the tax on the withdrawal.