This blog has been prepared for informational purposes only, and does not constitute tax or financial advice. Please consult your tax advisor for guidance on your personal tax situation.
By Caroline Farhat
With the end of the year coming, it’s typically a time people start thinking about the goals they’ll make in the new year. Do you want to refinance student loans, pay down debt, or just cut back on your hefty clothing budget? You’re not alone. In fact, Inc. reported that about 60% of Americans currently make New Year’s resolutions. “Saving more and spending less” was the fourth most common resolution.
It may be tempting to wait until the ball drops to start working on your goals, but there’s one area you likely could be saving on that you’ll have to take action on now. Any guesses? If you thought of Uncle Sam, you’re right. With some strategic planning, you can maximize your tax savings so that you’re not left with a big bill when Tax Day rolls around. Ready to start saving? Here are four things that could maximize your tax savings before year-end.
Max out your retirement accounts
You’ve probably been told to save for retirement hundreds of times. There’s a good reason for that. The earlier you begin contributing to retirement accounts, the more time it allows for the money to compound and increase.
So how does contributing more at the end of the year help your taxes? If you contribute to a tax-deferred retirement account, such as a 401(k), the contributions could help lower your taxable income for 2019. There is a maximum amount you can contribute to retirement accounts and it can change yearly. For 2019 the limit is $19,000 if you are under the age of 50, and $25,000 if you are 50 or older. In 2020 the limit is $19,500 for under the age of 50, and $26,000 for ages 50 and older. Bottom line: If you have not reached the limit and you’re financially able to contribute more, it may be beneficial to contribute an additional amount up to the $19,000 limit so you can lower your taxable income.
Be strategic with your income
This tactic is especially important for you freelancers out there who might have more control over when you can recognize income.
In order to know how to best be strategic with your income you need to consider if you anticipate being in a lower tax bracket this year or next year. If you anticipate being in the same bracket or a lower tax bracket next year, it’s likely more advantageous to defer your income to the following year. However, if you anticipate that you will be in a higher tax bracket next year, you may want to accept all the income you can now.
If you are self-employed, try to collect all unpaid invoices before the end of the year if you think you’ll be in a higher tax bracket next year. If you think you will be in a lower tax bracket next year, wait to collect payment from the invoices after January 1.
If you work as a full-time employee, a bonus you may receive is typically the best way to defer income. Check with your HR and/or payroll departments to see if this is a possibility.
Maximize other tax deductions
There are a lot of other ways you can maximize your tax savings at the end of the year. Here are some examples:
- If you have a mortgage, it may be beneficial to make one extra payment at the end of the year since mortgage interest is deductible on your taxes. If the payment due in January is paid in December that will be more interest you can take as a tax deduction. In addition, if you have mortgage insurance the same principle applies.
- Make a charitable donation and you may be able to take that as a tax deduction. Be sure to save your receipt as proof!
- If you have a health savings account, try to contribute up to the maximum allowable amount. Contributions to an HSA are deductible and reduce your taxable income. The maximum contribution limits for 2019 are $3,500 for individuals and $7,000 for families. People ages 55 and older can contribute an extra $1,000.
Make an extra student loan payment
Making an extra student loan payment is another great way to potentially maximize your tax savings because you can deduct up to $2,500 of student loan interest paid. Student loan interest can be deducted whether you itemize deductions or not, so this is a great perk for everyone paying student loan debt to consider. The deduction of $2,500 is per tax return not per person, so if you and your spouse both pay on student loan debt you still can only deduct $2,500 of the interest you paid between the two of you. In addition, there are income limits to be aware of. For tax year 2019, in order to qualify to take the full deduction your modified adjusted gross income (MAGI) must equal or be below $70,000 for single tax filing status and $140,000 for married filing jointly. If your MAGI is above $85,00 as single tax filing status and $170,000 for married filing jointly you are not eligible to deduct any of the student loan interest. If your MAGI is between the two limits you may be able to deduct some of the student loan interest you have paid.
If looking at your loan payments is making your head hurt, it might be time to start looking at your student loan refinancing options. While saving on your taxes is a great start, student loan refinancing could potentially save you thousands of dollars. You can see just how much you can save each month, and over the lifetime of your loan, by using our student loan refinance calculator*.
While filing for taxes will never be fun, you can make it easier on your bank account by doing a little planning ahead of time. Implement some of these tips and you could see the benefits come tax time. If nothing else, you will be working towards a better financial outlook in the new year!
Each person’s tax situation is different. The tips above are not intended to replace the advice of a trained tax specialist. Make sure to do your research and consult your tax advisor for guidance.
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