Think it’s too late to lower your taxes? Think again! Here are 7 tax tips to help you lower your taxes, save money when preparing your tax return, and avoid tax penalties.
1. Contribute to your retirement accounts.
If you haven’t already done so for 2019, make sure to fund your retirement account by April 15, 2020! That is the deadline for traditional IRA and Roth IRA contributions. If you have a Keogh or SEP and you get a filing extension to September 15, 2020 or October 15, 2020, you can wait until then to fund your 2019 contributions for those accounts.
Making a deductible contribution will help you lower your tax bill this year – and, the sooner you do it, the sooner your money begins to compound tax-deferred. Talk about a win-win. For example, if you put away $5,000 a year for 20 years in a retirement account with an 8% annual return, your 100,000 in contributions will grow to over $247,000. In a taxable account, that same account would only grow to about $196,000 if you’re in the 24% tax bracket. All around, it pays to save.
2. Organize your records for tax time.
Good organization may not cut your taxes, but it sure is wise! We’ve seen it for years – getting all of the documentation together at tax time is the biggest hassle for some. This includes last year’s tax return, this year’s W-2s, 1099s, receipts, and so on. If you are missing important documents, you may cost yourself more in tax (or penalties).
What’s the best way to go about it?
- Print out a tax checklist so you know exactly what you’ll need to complete your tax return.
- Gather all the information that you get in the mail in January/February, like W-2s, 1099s, mortgage interest statements, etc. Don’t throw away anything, even if they don’t look very important!
- Collect receipts and information that you’ve piled up during the year.
- Make sure you know the price you paid for any stocks or funds you’ve sold. If you’re unsure, give your broker a call.
- Know the details on income and expenses for rental properties or other small businesses. Having this kind of information at your fingertips will help you get through tax season smoothly.
3. Itemize your tax deductions.
While it might be easier to take the standard deduction, itemizing your deductions can save you a bundle, especially if you have extensive medical expenses, own a home, or live in a high property tax area.
You might be asking yourself – is it worth it? When your qualified expenses add up to more than the 2019 standard deduction of $12,200 for singles ($24,400 for married couples filing jointly), it sure is!
You may already know some of these deductions, such as those for mortgage interest and charitable donations. However, you may not know that you can also deduct state and local income or sales taxes paid or the portion of medical expenses that exceed 7.5% of your adjusted gross income for 2019 (10% of AGI beginning in 2020). Meet with a professional [link] to see which itemized deductions apply to you.
4. Consider claiming a home office tax deduction.
Recently, the IRS has loosened the eligibility rules for claiming a home office. If you have no fixed location for your business, you might be able to claim a home office deduction if you use your space for administrative or management activities (even if you don’t meet clients there.)
Now, you must use your home space exclusively for business. But if you legitimately qualify for the deduction, there should be no problem claiming it!
This deduction allows you to write off expenses that are associated with the area of your home where you exclusively conduct business, such as rent, utilities, insurance, and housekeeping. The percentage of these costs is based on the square footage of the office to the total area of the home.
5. Be sure to provide dependent taxpayer IDs on your tax return.
When filing your tax return, plug in Taxpayer Identification Numbers (typically SSNs) for your children and other dependents on your return. Forgetting to do this means that the IRS will deny any dependent credits that you should benefit from, like the Child Tax Credit.
If you’re divorced, pay close attention. Only one of you can claim your children as dependents. Lately, the IRS is closely checking to make sure of this. Making a mistake here means that processing your tax return will come to a screeching halt.
If you’ve just had a baby, make sure to file for your child’s Social Security card right away so that you have their Taxpayer Identification Number ready to go. Most hospitals will do this automatically for you, but it’s worth a double check! If you don’t have the number you need by the tax filing deadline, it’s better to file an extension rather than to submit a return without a required Social Security number.
6. File and pay on time.
Getting it submitted correctly and on time is the best option all around – if for no other reason than you want to get your taxes over with!
However, if you can’t finish your return on time, make sure you file Form 4868 by April 15, 2020. That will give you a six-month extension until October 15, 2020. It’s significantly better to request an extension than to file late. Otherwise, the IRS can hit you with a late-filing penalty of 4.5% per month of the tax owed, and even a late-payment penalty of 0.5% a month. Filing Form 4868 stops the clock running on the late-filing penalties, but you still need to pay any tax you might owe in order to avoid the late-payment penalties.
7. Know when to call in help.
A CPA can handle your most complex returns with ease. We’ve been filing tax returns for years, and we know how to help you minimize your tax liability by claiming all of the deductions that are unique to you. We’ve seen just about every problem under the sun, and we know that having a professional on your side when tax season comes around can relieve you of a lot of stress.