Tax season 2019 is upon us. Typically, this is a time of year for anxiety and procrastination for many taxpayers. This year will be different. We want to take some time to alleviate the anxiety, confusion, intimidation, fear and procrastination for most taxpayers by offering some tax tips that will minimize your taxable income and tax liabilities, if applicable and maximize your income tax return.
The first thing you want to do as a taxpayer is maintain great and accurate records. The Internal Revenue Service can come back to audit your tax returns for a period of three years, and six years if your taxable income is misstated by more than 25%.
Secondly, you want to reduce your taxable income by taking advantage of any tax deferrals that are allowed by the Internal Revenue Code. One of the best ways to defer your taxable income is by contributing to an IRA (Individual Retirement Account), 401k, 403b, most 457 plans and the federal government’s Thrift Savings Plan. And yes, as a taxpayer, you can contribute to both the IRA and employer elective deferral retirement plans.
The 2018 IRA contribution limit is $5,500 and $6,500 for taxpayers age 50 or older. The defined contribution limit for 401k, 403b, most 457 plans and the federal government’s Thrift Savings Plan is $18,500 for 2018. The employee catch-up contribution for taxpayers age 50 or older is $6,000. Do not fear if you have not met these contribution limits for 2018, plan to make the contributions in 2019 so that you will satisfy the contribution limits this year. Also note, the IRA contribution limit for 2019 is $6,000 and $7,000 for taxpayers age 50 or older. The 2019 contribution limit is $19,000 for most employer deferral plans. The 2019 catch up contribution for taxpayers age 50 or older remains $6,000 for most employer deferral plans.
Thirdly, a taxpayer can defer up to $2,600 in taxable income by contributing to a Flexible Spending Account (FSA). These accounts allow the taxpayer to claim the typical deductibles they would pay toward health insurance, dental and vision plans. The taxpayer can also deduct copays for visiting healthcare providers, as well as those amounts paid toward prescription medications.
Fourthly, as a taxpayer, you want to gain an understanding of all the tax credits that you will qualify for in the 2018 tax year. Tax credits are tax incentives or amounts of money that can be offset against a tax liability, and tax credits may allow you to qualify for a refund even if you have not paid any federal income taxes. One of the most popular tax credits is the Earned Income Tax Credit (EITC). For 2018, the maximum EITC amount available is $6,431 for taxpayers filing jointly who have three or more qualifying children. The Child Tax Credit is worth up to $2,000 per qualifying child with the age cut-off being 17. The refundable portion of the credit is limited to $1,400. New for 2018 is the $500 nonrefundable credit for qualifying dependents other than children. There is a Lifetime Learning Tax Credit of up to $2,000 for qualifying tuition expenses. This credit can pay for undergraduate, graduate and professional degree courses. There is no limit on the number of years you can claim this credit. The American Opportunity Credit is up to $2,500 per eligible student. This is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. Please note a taxpayer cannot claim both the Lifetime Learning Tax Credit and the American Opportunity Credit.
Finally, as a taxpayer, you want to know if you will qualify for the standard deduction or itemized tax deduction. For 2018, the standard deduction for single and married filing separately is $12,000. The standard deduction for head of household is $18,000. The standard deduction for married filing jointly is $24,000. Please note a taxpayer cannot claim both the standard deduction and the itemized deduction. However, a taxpayer can claim the deduction that yields the highest result. In order for a taxpayer to itemize deductions, the itemized deductions have to be greater than the standard deduction. The most frequent itemized deductions include medical expenses greater than 7.5% of the taxpayer’s adjusted gross income, property taxes, sales taxes, mortgage interest and charitable contributions. Remember the limit for property tax and sales tax deductions is $10,000. Also note, the Internal Revenue Code allows taxpayers to deduct up to 60% of their adjusted gross income for charitable contributions. In addition to deductible charitable contributions, the Internal Revenue Code allows 14 cents per mile driven in service of charitable organizations. With deductible medical expenses, the Internal Revenue Code allows 18 cents per mile driven for medical purposes.
Taking advantage of the aforementioned tax tips may allow you as a taxpayer to minimize your taxable income and tax liability and maximize your income tax refund.