Like it or not, taxes are a part of life -- but that doesn't mean you should pay more of them than necessary. If you fall victim to these three mistakes, however, you'll increase your chances of doing just that.
1. Not saving (or not saving enough) in an IRA or 401(k)
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IRAs and 401(k)s are designed to help workers save for retirement, and the more you contribute to an account today, the more income you stand to have as a senior. But that's not the only reason to fund an IRA or 401(k); any time you contribute to the traditional version of either account type (as opposed to a Roth), you get an immediate tax break on the money that goes in.
Currently, workers under 50 can contribute up to $18,500 a year to a 401(k) and $5,500 to an IRA. Come 2019, these limits are increasing to $19,000 and $6,000, respectively. Meanwhile, the current limits for workers 50 and over are $24,500 for a 401(k) and $6,500 for an IRA, and these numbers will rise to $25,000 and $7,000, respectively, once 2019 kicks in. Your tax savings for funding your retirement plan will depend on your effective tax rate, but if it's 24%, and you put $5,000 into either account type, you'll shave $1,200 off your taxes, just like that.
It's estimated that 21% of Americans have no retirement savings at all, and if you're one of them, it means you're automatically losing out on this very lucrative tax break. The same holds true if you're only contributing a small amount each year when you have the ability to do better. If that's the case, open an IRA or sign up for your employer's 401(k), or increase your contributions to whatever account you already have.
2. Forgetting to pay estimated taxes on your side hustle
Whether you have a side hustle to drum up vacation funds, pay your bills, or tackle outstanding debt, working a second gig is a great way to boost your earnings and develop key skills at the same time. But if you do that side work as a freelance contractor, you won't have taxes withheld from your earnings. Rather, you'll be responsible for making estimated quarterly payments to the IRS to account for that additional income. Many people think they can sit back and wait until they're ready to file their returns to deal with those taxes, but if you rack up too much of an unpaid tax bill along the way, you could wind up on the hook for penalties. And that's a good way to lose money needlessly.
3. Not adjusting your withholding
If you've historically gotten a tax refund, and your income didn't change substantially this year, there's a good chance you've been overpaying your taxes thus far. The 2018 tax overhaul resulted in an almost across-the-board lowering of tax brackets, so if you haven't been seeing a lot more money in your paychecks, it could be that you've been letting the IRS have too much of your money from month to month.
Of course, things will even out when you go to file your next tax return -- meaning, if you overpaid your taxes, you'll have a refund coming to you. But tax refunds aren't actually a good thing, since they essentially mean you are giving the government an interest-free loan. That's why it pays to take a closer look at your withholding and make changes as necessary to get more of your money.
The U.S. tax code is complicated, and unfortunately, that opens the door to mistakes that are easy enough to fall victim to. Recent changes to the tax code have only complicated matters, so if you feel you're clueless about taxes, it might pay to enlist the help of a professional. A small investment in outside help might save you an even greater sum going forward.
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