Before 2019 comes to a close, there are decisions you can make right now that will help you during the upcoming tax filing season. This is a perfect time to take stock of your financial health and ensure that you keep as much of your hard-earned money as possible when April 15 rolls around. I’ve compiled a few tips that will help your money go further as the sun sets on 2019:
Maximize your retirement contributions
Saving for retirement is not only good practice, it’s also one of the most effective ways to lower your taxable income for the year. The maximum 401(k) employee contribution for 2019 is $19,000 (increasing by $500 to $19,500 for 2020) and the catch-up contribution for those 50 and over is $6,000 (increasing by $500 to $6,500 in 2020). In addition, the combined employer and employee contribution limit is $56,000 (which rises by $1,000 to $57,000 for 2020). Additionally, you may want to make a contribution to an IRA, which remains at $6,000 (plus $1,000 for catch up contributions) for both 2019 and 2020, but the deductibility of these contributions may be limited. Don’t have a retirement account? There’s still time to set something up. Some accounts need to be set up by Dec. 31, while others give you until April 15.
Donate to charity
Find some worthy causes and do some good. If you expect to itemize deductions for 2019 and give to an IRS-qualified organization within the tax year, you may be able to claim an itemized deduction for the full amount that you give. Also, if you are over the age of 70½, you can direct your Required Minimum Distribution (up to $100,000) to be paid to your favorite public charity without reporting it to the IRS (QCD – qualified charitable distribution). This is a great way to make your donation tax advantageous even if you do not itemize!
Use your flexible spending account (FSA)
Annually, you can elect to contribute pre-tax dollars to pay for eligible healthcare expenses. This means that you will save an amount equal to the taxes that you would have paid on the money set aside. You may set aside $2,700 per year (increasing to $2,750 for 2020). The money can be used to pay for out-of-pocket expenses such as medical, dental, prescription, hearing and vision expenses. While you generally must use the money within your employer’s plan year, the employer may offer a grace period or a carryover amount (be sure to check with your employer’s HR department for your particular FSA plan options). Also look at your prior year’s health expenses to guide you on how much you should elect to set aside each year.
Account for losses
If you have not already sold any securities at a loss this year, now is the time to review your portfolio and consider triggering a loss. You can deduct up to $3,000 of capital losses ($1,500 if married and filing a separate federal return) on your federal income tax return. Just be careful not to repurchase the same security within 30 days or the “wash-sale” rules will deny the current year deduction.
Check out your W-2 withholdings
If you owed a large lump sum to the IRS or the Commonwealth of Massachusetts last April and you have not already increased your withholdings, consider doing so now to prevent a nasty tax bill next year. On the other hand, if you received a large refund last year, consider lowering the withholdings from your pay – if you don’t, you are essentially giving the government an interest-free loan.
Organize
The end of the year is the perfect time to be proactive. Make sure your receipts, papers and notes are in one place and organized in a way that makes sense to you. If you haven’t done any of this yet, do so now. It’s better to deal with six months of disorder rather than twelve. Your future self will thank you.
While tax season can be a struggle, there are experts across Massachusetts who are available to help. If you are in doubt about your specific tax situation or just plain overwhelmed by this process, contact a local CPA. It’s what we’re here for.
Nancy A. Fournier, CPA is a principal at Melanson Heath in Greenfield and a member of the Massachusetts Society of CPAs (MSCPA). This article was developed in coordination with the MSCPA. For more tax planning advice, or to find a CPA in your area, visit the MSCPA’s website at www.mscpaonline.org/find.