Tax Tips Ahead of the 2019 Tax Deadline
As we did last year, below is a compiled list of potential actions (with updated figures) you may still be able to take before filing your 2019 taxes. Where applicable, these steps will help ensure you leave nothing on the table.
Health Savings Accounts, or HSAs, are a great way to set aside savings specifically for health expenses tax free. And, HSA contributions can be made up until the April 15th tax filing deadline. Such contributions can total up to $3,500 for individual plans and $7,000 for family plans. You must be enrolled in a High Deductible Health Plan to make contributions.
HSA contributions go into the HSA tax-free. The dollars also come out tax-free as long as it is spent for health expenses. Some HSAs allow investment of funds which, combined with the tax benefit, can also make this a great long-term savings option to provide tax free growth for future medical costs. HSA accounts are not “use it or lose it” types of health savings accounts, like FSAs or cafeteria plans.
If you have HSA contributions deducted from your paycheck, check your W-2 to see if you have maximized your contributions for 2019.
In addition to the HSA, you may be able to save up to $6,000 or $7,000 (for those age 50 and over) into a Traditional IRA or a Roth IRA if you have earned income from a job.
Roth IRA contributions are allowed if modified adjusted gross income (MAGI) isn’t too high.
If you are filing Married/Jointly, you and your spouse can each make Roth contributions if your 2019 MAGI is less than $193,000. If your MAGI is over $203,000, neither of you can make contributions. If you’re between these amounts, you can make a partial contribution. The same rules apply for Single filers, but with the income phaseout between $122,000-$137,000 instead.
Traditional IRA contributions have two sets of rules for contributions since they can be deductible or non-deductible from taxes.
Deductible Traditional IRA contributions are allowed based on income. These income phaseouts change based on whether the individual participates in an employer-sponsored plan, like a 401(k). While the Roth IRA phaseout reduces the dollar amount you can contribute, the Traditional IRA phaseout determines how much is deductible.
There are different income phaseouts for whether individuals, their spouse, or both participate in an employer-sponsored retirement plan. For example, it’s common to see one spouse be able to deduct IRA contributions while the other isn’t. In this case, the spouse that can make deductible IRA contributions should do so, while the other should focus on maximizing their 401(k) first, before making non-deductible IRA contributions.
If you are above all income limits, you and your spouse can still make non-deductible IRA contributions. One misconception about non-deductible IRA contributions is that they aren’t worth it because future withdrawals are fully taxable. However, future withdrawals of the amount contributed are tax-free since they are a return of principal. The earnings portion of any non-deductible contributions would be taxable, but that money is still growing tax-deferred for potentially decades.
If you are eligible for both the Roth IRA and deductible Traditional IRA, which should you choose? Generally, you should contribute to a Traditional IRA if you’re in a ‘high earnings’ year, or Roth if in a ‘low earnings’ year.
For Business Owners
If you had self-employment income in 2019, you could make tax-deferred SEP IRA contributions up to 25% of individual compensation, up to $56,000. Keep in mind that the IRS requires business owners to also make contributions on behalf of eligible employees. The plan can be established and funded up until your tax filing deadline plus extensions.
As we mentioned last year, be sure you understand how the tax law passed in 2017 affects your business. If you don’t have a 100% understanding of that tax law, we recommend consulting a Certified Public Accountant or CPA.
One costly mistake you can make under this tax law is that you can misclassify your business, causing yourself to pay more in taxes. Under the revised 2017 rules, there are provisions that allow you to deduct varying amounts of your income based on whether your business is classified as a service or non-service business.
If you run a business, consult your CPA early, or extend your deadline, so you can evaluate how the tax law affects your situation.
For many people, pro-active and smart tax planning yields benefits and improves their financial situation. Though it may be a little extra hassle now, you will thank yourself later. Moreover, even if it doesn’t help you, you’ll have added confidence that you paid only what you owe and nothing more.
If you have questions about where to direct savings for investment, how much you can save to specific accounts, or need a good CPA referral, give us a call, and we’ll be happy to help. For specific tax advice, reach out to a CPA for their expertise. Happy tax filing!