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3 Ways to Lower Your Tax Bill

Photo of author, Nicole Gabriel, CFP®.
Nicole Gabriel, CFP®
Financial Strategist

Did you know that nearly one-third of the taxpayers facing a federal tax bill this year (2018) received a refund last year (2017). *

The Tax Cuts and Jobs Act was signed into law on December 22, 2017 in an effort to reduce tax rates for business and individuals and to simplify the filing process. For many clients and individuals, these efforts didn’t come to fruition. Whether you were pleased or displeased with your 2018 tax return, it’s never too early to start preparing for your 2019 taxes.

Here are three timely tax-saving strategies you can employ now to lower your tax bill next year.

#1 Withholding Tax
The Tax Cut and Jobs Act adjusted the tax withholding tables. This changes the amount of income taxes withheld from each paycheck. If you withhold too much, you may get a refund the following year, but you will have given the government an interest-free loan. If you don’t withhold enough, you will see a larger paycheck, but you may owe the IRS the following year. To review or change your withholding on your W-4, you should contact your Human Resources Department.

#2 Tax-Savings Opportunities at Work
Saving in your 401(k) has two benefits: it lowers your taxable income and it builds toward a secure retirement. The annual contribution limit for 401(k) plans, as well as 403(b) and most 457 plans, is $19,000 for 2019, and those taxpayers age 50 or older are entitled to an additional $6,000.

If your employer offers a Heath Savings Account (HSA), it is a benefit you should consider! These accounts offer a triple tax advantage! The money goes into the account pre-tax which reduces your taxable income, the distributions are tax-free (with a few exceptions), and the earnings accumulate tax-free. If you are interested in Heath Savings Accounts, please read the article by my colleague, Chelsea Clegg.

#3 Plan Charitable Giving
Because the Tax Cut and Jobs Act increased the Standard Deduction, many taxpayers may no longer itemize, making them unable to take a charitable deduction. However, bunching charitable donations may allow you to itemize your return and take advantage of a charitable deduction. For example, if a couple currently donates $15,000 a year to charity, they may only take the standard deduction of $24,000 per year. This means over the course of two years, they would have total deductions of $48,000.

However, if they were to bunch their charitable giving in 2019 by donating a total of $30,000 in one year, they would be able to take an itemized deduction of $30,000. Since they bunched their charitable giving in 2019, they would make no donations in 2020 and use the standard deduction of $24,000. This leads to total deductions of at least $54,000. The couple is still donating $30,000 to charity, but by bunching their donations to fall within the same tax year, they can deduct more! See chart below:

No Bunching With Bunching
2019 2020 2019 2020
Charitable Donation: $15,000 $15,000 $30,000 $0
Deduction: $24,000
Total Deductions: $48,000 $54,000

Taxes and Tax Planning is complicated and even more so in light of the recent tax law changes. Your McKinley Carter advisory team is equipped to be a source of help in making good financial decisions to help you in your pursuit of a good life. We invite the opportunity to talk about your specific situation today or during our next conversation.

Source: *NerdWallet 2019 Tax Study

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