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The end of the year is coming up quickly. And while you’re probably focused on the holidays, don’t overlook your taxes. Financial planning might not be as fun as holiday parties and gift exchanges. (Well, maybe for you it is.) Either way, you might be able to save money when you file your taxes in April if you take some smart steps before December 31.
Bill Abel, tax manager with accounting and business consulting firm Sensiba San Filippo, shares a few tips on lowering your 2019 tax bill.
1. Donate to charity
Charities need your money throughout the year. But as you’ve no doubt noticed, appeals for your donations skyrocket in November and December.
It’s not just the spirit of holiday generosity that’s motivating end-of-year donations. You can deduct the amount you donate from your taxes. How much can you save? That depends on your tax bracket. Say, for example, you pay 25% in federal taxes and 10% in state taxes. You’ll effectively save 35%, so a $100 donation to your favorite charity will cost you $65 once the tax savings are factored in.
In fact, Giving Tuesday was launched seven years ago on the Tuesday after Thanksgiving to encourage people to support charitable organizations.
It’s important to keep a few things in mind. You only get these savings if you itemize deductions. “If you take the standard deduction it’s still great to donate to charity, but you don’t get these benefits,” Abel says.
If you can afford it, you’re allowed to donate up to 60% of your adjusted gross income. And these rules apply to cash donations. If you donate stocks or other items, you’ll need to talk to your accountant about how that impacts your tax bill. “Donating stocks is a little more involved, but the majority of people are donating cash,” Abel says.
2. Catch up on your 401k
Look at your last pay statement and see if you’re on track to maximize your 401k contributions. You can contribute $19,000 — and if you’re age 50 or over you can add another $6,000 in catch-up contributions. “One of my biggest recommendations if you’re able to do it is a 401k catch-up contribution,” Abel says.
If you can swing it, talk to your employer about diverting additional money from your paycheck to your 401k between now and the end of the year to maximize your contribution.
3. Take a look at your college tuition bills
If you’re footing the bill for children in college, check out the American opportunity tax credit. Depending on your household income, you could qualify for a credit of up to $2,500 a year for four years.
If your income is high enough that you don’t qualify for the credit, talk to your tax planner to see if it makes sense not to claim your child as a dependent. That way, your child might be able to get the credit. “That’s not super commonly known, but I see it come up,” Abel says.
If you withdraw money from a 529 plan to pay for college expenses, make sure you sync up your calendar year with the academic year. Be careful about withdrawing money in December to pay a January tuition bill — your withdrawal won’t be in the same tax year. The amount you withdraw in a year needs to be no more than the amount you actually paid in that calendar year.
4. Consider a health savings account
If you have a high-deductible health plan and you anticipate large medical expenses coming up, you might want to fund a health savings account. This year’s limits are $3,500 for an individual or $7,000 for a couple.
Abel thinks these accounts are good if you need them for medical expenses but he’s not a fan of using them as savings vehicles, since a lot of them don’t offer good investment options.
5. Keep an eye on your medical expenses
Tracking your medical costs is a hassle, but if you think your expenses might go over 10% of your adjusted gross income, go back and take a closer look. Once you get over 10% you can deduct these expenses from your taxes.
6. If you’ve made money on stocks, look for losses
The stock market has been strong this year, and if you sold stock for a taxable gain consider selling any stocks that are at a loss by December 31. That way, you can claim the losses against the gain. “If you wait until January, those losses can’t go backwards,” Abel says. “It could be a really big difference.”
7. Talk to your tax advisor
The Tax Cuts and Jobs Act brought a lot of changes to tax law. Your accountant or financial planner can help you evaluate your situation before December 31 and recommend any changes that might help reduce your tax bill.
