What You Can Do This Year to Improve Your Tax Return
Though the majority of Americans haven’t filed their 2019 tax returns just yet, many are beginning to get a decent picture of what they will owe or what they can expect to get back on their tax refund this year. If you’re not happy with the way your tax return is panning out for 2019, then you may want to start taking steps to improve your situation for 2020 right now. Here are a few things you can do this year that might make next year’s tax return more agreeable for you.
Contribute to Your Retirement
Contributing to your retirement is one of the best ways to reduce your taxable income, because it doesn’t actually require you to give up any of your income; you’re simply placing those funds in a separate account for your use at a later date. If you haven’t been contributing to retirement accounts, consider opening an IRA this year to get started.
The current maximum contribution for IRAs is $6,000 per year. By putting a few hundred a month into your IRA, you can reduce what you’ll owe in taxes for 2020 while also building a nest egg for your retirement. Contributions to a 401k are also deductible, so consider speaking to your employer about whether or not they offer a 401k plan for employees.
It’s also important to note that contributions to IRAs before April 15, 2020, are deductible on your 2019 return. So, if you’re looking for a quick way to reduce your tax liability for your current tax filing, consider making a lump sum contribution to an IRA account before then.
Get an HSA If You Can
While not everyone is eligible for a health savings account (HSA), those who do qualify for one have another way to reduce their taxes without actually giving up any of their income. HSAs are typically available for those on high-deductible health plans, so if you have such a plan, speak to your insurance provider about whether or not they offer an HSA.
You can place pre-tax dollars into an HSA account and use those funds to pay for medical expenses. This means your co-pays and other medical bills are paid with untaxed funds. Maximum contributions to HSAs are $3,500 for individual plans and $7,000 for HSAs, so if you max out your HSA contributions this year, you can significantly reduce your taxable income while also building a savings account for your medical expenses.
Lump Your Deductions
Many individuals have regular deductions that they take—particularly in the form of annual giving to churches and charities. If this is something you do, you may want to consider “lumping” those deductions together between this year and the next. Here’s an overview of what that would mean:
Let’s say you give $10,000 to your favorite charity every December. This year, instead of giving in December, give in January of 2021. While this may increase your taxable income this year, it can save you taxes in the long run. Because your deductions would likely be low this year, without that contribution, you can take the standard deduction on your return.
Then, in 2021, you would have a charitable contribution in January, as well as your regular one in December, making for a total of $20,000 in charitable contributions to that charity alone. With such high deductions, you can itemize your deductions for 2021. Between those two tax years, you’ll be deducting a lot more on your return than you would by making your regular annual contribution each year.
Go Back to School
Whether you’ve earned a degree already or not, there are always opportunities for learning. If you’ve been considering taking a few courses to improve your earning potential in the career field, you could qualify for the Lifetime Learning Credit. This allows you to deduct up to 20% of your first $10,000 in educational expenses every year, even if you’re not actively pursuing a degree.
This means that, even as a full-time worker, you can take continuing education courses in your field and deduct qualifying expenses associated with those courses. Plus, you could just earn yourself a raise while doing it.
The fact of the matter is, the best time to improve your tax situation is not when you’re already filing your return—it’s at the beginning of the tax year. And, the best way to do that is to sit down with a professional tax planner and go over your finances to determine what you can do this year to create a better tax picture by the end of the year.
So, if you really want to have a better tax return for 2020, contact us and make an appointment to sit down with one of our CPAs. We’ll go over your finances with you and help you lay out a tax plan for the year so that you’ll be much happier with your tax return next year.
Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174