Too High a Tax Bill for 2018? Here's How to Lower Your 2019 Taxes
Each year, the majority of people who file a tax return get some sort of refund from the IRS. But if you were among those folks who owed money for 2018, you may not be particularly happy with this tax season's outcome. Even if you did receive a refund, it could still be the case that your tax bill went up as a result of the 2018 overhaul, or another factor. But worry not -- just because you paid more taxes in 2018 doesn't mean you're doomed to do so this year. Here are a few easy steps you can take to lower your 2019 taxes.
1. Max out your retirement plan -- or get as close as possible
Contributing to a tax-advantaged retirement plan like a traditional IRA or 401(k) could work wonders for slashing your tax bill. That's because the funds you contribute go in tax-free, thereby reducing the income the IRS is allowed to tax you on.
Currently, workers under 50 can contribute up to $6,000 a year to an IRA, and $19,000 to a 401(k). Those 50 and over, meanwhile, get a catch-up option that raises these limits to $7,000 and $25,000, respectively. The closer you get to maxing out either account, the more of your earnings you'll shield from taxes.
Now, keep in mind that if you choose to save for retirement in a Roth IRA or 401(k), you won't get an immediate tax break for doing so. There are other benefits to saving in a Roth account, but if your primary goal is to lower your taxes, you'll need to stick with a traditional IRA or 401(k).
2. Fund a health savings account
If you have a high-deductible health insurance plan (defined as $1,350 for single coverage or $2,700 for family coverage), you may be eligible to contribute to a health savings account, or HSA. As is the case with a traditional IRA or 401(k), HSAs are funded with pre-tax dollars, thereby reducing the amount of income you're taxed on.
Once you put money into an HSA, it can be invested for additional growth and then withdrawn tax-free to cover qualified medical expenses. You can contribute up to $3,500 to an HSA this year if you have individual coverage, or $7,000 if you have family coverage. And if you're 55 or older, you're allowed an additional $1,000 catch-up contribution on top of these limits.
3. Open a flexible spending account
A large number of employers offer flexible spending accounts (FSAs) these days, and they come in two varieties -- health and dependent care. With the former, you can contribute up to $2,700 this year to pay for qualified medical expenses like co-pays, prescriptions, eyeglasses, and certain medical supplies and equipment. With the latter, you can contribute up to $5,000 to cover the cost of child care so you can work.
FSAs are funded with pre-tax dollars, so once again, by participating, you're making sure that the IRS can't tax a portion of your earnings. One thing you should know about FSAs, however, is that they generally operate on a use-it-or-lose-it basis, so if you don't spend down your account balance by the time your plan year is up, you risk forfeiting that unused money. That said, if you're paying for full-time child care, there's a good chance you'll have no trouble accruing $5,000 on the dependent care side. And if you estimate your medical expenses carefully, you should be good there, too.
4. Dump losing investments
If you have bum investments taking up valuable real estate in your portfolio, selling them at a loss could help your tax situation this year. Investment losses can be used to offset capital gains, so if you take a $5,000 loss but have the equivalent amount in gains, you don't pay taxes on the latter. Furthermore, if your losses for the year exceed your gains, you can apply up to $3,000 of your total losses to offset your ordinary income -- which means the IRS won't tax you on that amount. And if you're still left with a loss after that, you can carry it to future tax years.
We all want to keep our taxes as low as possible. If you didn't like the way 2018 treated you tax-wise, be more strategic this year. With any luck, you'll get to keep more of your money out of the IRS's hands.
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