Hopefully, your 2018 taxes are in the rearview mirror, but it’s not too late to plan ahead for next year. Although Uncle Sam might have taken more out in taxes than you wished back on April 15, you can still take steps to minimize your tax burden going forward. Don’t wait until Tax Day 2020 is creeping up on you to think about it.
Start by taking a look at tax brackets for 2019, projecting your income and expenses. If your employer offers a 401(k), consider contributing. Not only will it help protect you in the decades ahead, but it can reduce your tax burden in the here and now. If you’re self-employed or run a small business, it’s a great time to set up a retirement plan. You can see significant tax deductions for funds contributed to certain kinds of IRA or 401(k) plans.
Small business concerns
If you want to start a business or already are a small business owner, you’ll want to think very carefully about its corporate structure. They might sound like alphabet soup right now, but the different types of business entities, including sole proprietorship, LLC, C corp and S corp, have a direct impact on how your future taxes are calculated.
How you set up the company influences how taxes are calculated, how often you pay them and, ultimately, how much you will owe. A new twist: The 2017 U.S. Tax Cuts and Jobs Act contains a 20% tax deduction for the owners of certain types of pass-through entities (including some of the examples of alphabet soup mentioned earlier.)
What does that mean? For eligible corporate entities, it means the profits directly flow from the business to the owner. That income is claimed on the individual’s income tax return instead of through payroll taxes. So, hopeful entrepreneurs need to keep this in mind when making plans, and, if your 2018 taxes for your existing business were higher than you’d like, restructuring might make sense.
Know your deductions
The U.S. Tax Cuts and Jobs Act also reduced the effectiveness of itemizing tax deductions for many families by increasing the standard deduction substantially. Back in 2017, a married couple had to have more than $12,600 in taxable income to itemize expenses. In 2019, that jumped to $24,000.
Although it makes filing taxes easier, it also reduces the tax benefits of charitable giving at lower income brackets. A married couple now has to make more than $24,000 in taxable income to even start claiming deductions for charitable expenditures.
People are inventive, so we’ve been seeing new ways that people are looking to maximize the tax benefit of their charitable giving. Some people might begin bundling their donations — for example, making a $15,000 gift once every three years, instead of donating $5,000 over three years.
You’re probably a very busy person, whether you’re a business owner or are working for somebody else. Life happens. It’s easy to put off all the homework and drudgery of preparing for Tax Day until tomorrow … or the day after.
Don’t do it. Trust me on this. All the little things pile up, and it’s easy to forget details or lose important documentation. Set aside time each week or month to balance your checkbook and file away any important documentation like receipts or paperwork. Don’t forget to check your withholdings to make sure just enough money is being taken out of your check. Not too much, though. Giving an interest-free loan to Uncle Sam is admirable, but you could probably use that money somewhere else on a daily or monthly basis.
One last thing. No matter how experienced or knowledgeable you are about personal finances or taxes, it is worth your while to consult a professional. What you don’t know can hurt you, and it’s good to get an objective set of eyes on your numbers. It can save you money in the long run.