That’s probably the last thing you want to think about during the hectic holiday season. But thinking ahead and taking certain actions before the end of the year can significantly reduce your income tax liability for 2019.
Your first decision is whether or not you will prepare your own tax return. As you evaluate this question, consider these facts: The tax rules are 75,000 pages in length, with more than 71 pages devoted just to tax credits and 19 pages to penalties. That’s plenty of opportunity to make mistakes or to miss out on ways of reducing your taxes.
After several years, Navin Shah is writing his last column for The Covington News. He is the chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers. He is also vice chairman of Embassy National Bank, a community bank in Lawrenceville he helped establish in 2007 and has become one of the leading SBA “Preferred Lenders” in the Southeast. He can be reached by email at email@example.com.
Here are some topics to consider — and if appropriate, to discuss with a tax preparer in detail before Dec. 31:
- Are you filing single or married? If married, is it best to file separate or joint?
- Are you eligible to be considered “head of household”?
- Do you have two incomes — either as a single person or as a married couple?
- Are you considered “low” or “middle” income by the federal government and therefore eligible for certain special credits or deductions?
- Do you have children who qualify for a deduction?
- Do you pay for child care while you work, which might qualify for a tax credit?
- Do you make payments to a 401(k), 457 or IRA retirement plan beyond any retirement contributions by your employer?
- Do you qualify as elderly (above age 65) or disabled?
- Are you self-employed or have an office at home, which might qualify you for certain deductions?
- Does your occupation incur certain expenses that are eligible for deduction, such as a real estate agent who spends money on marketing, a server who buys a uniform or a teacher who buys school supplies?
- Are you eligible for a “dependent care” deduction, such as for an elderly parent or a child who is in college?
- Did you spend money this year to relocate for a new job or to take self-improvement courses for a current job?
The variables go on and on. So do the opportunities to reduce your tax obligation. For example, you may have heard of the Earned Income Tax Credit, which pays money to low-income earners who qualify, even if they do not owe any income tax. The guidelines vary based on amount of income and number of children, including step children or adopted children.
You may not be as familiar with the American Opportunity Credit that can be up to $2,500 toward college tuition if your adjusted gross income is less than $80,000 for a single taxpayer or $160,000 for a married taxpaying couple.
There is also the Lifetime Earning Credit if you are taking education courses. It can be as much as 20% of up to $10,000 per year for single taxpayers with less than $67,000 income or married taxpayers with less than $134,000 income.
Clearly, the tax code involves many programs, many nuisances, and many details. It’s impossible to become familiar with all of them, but one distinction is important to understand – the difference between a “tax credit” and a “tax deduction.”
A deduction is subtracted from your adjusted gross income to reduce your taxable income and in turn to reduce your tax bill. A credit is applied dollar-for-dollar against the amount of tax you owe – so if your tax is determined to be $500 and you have an eligible credit of $250, your tax bill is lowered to $250.
Perhaps you will decide it makes sense to use a tax preparer or perhaps you will choose to do your own taxes. Regardless of how you proceed, there are certain things you can do immediately, including some that can increase your tax breaks for 2019:
- Provide all your employers with any changes in information that might affect your W-2 form – such as a marriage, a divorce, or a change of mailing address.
- Defer income to 2020 so it is not taxed for 2019 – this may not be possible for salary or wages, but perhaps it can be arranged for a bonus and it certainly can be done if you are self-employed, if you are a consultant, or if you do freelance work.
- Gain deductions by donating to charity or by making certain payments during December – such as for medical bills or for your 2020 property taxes.
- Make the maximum contributions possible to any of your retirement or flexible spending medical accounts.
- Renew expiring tax identification numbers – Social Security numbers are valid for a lifetime, but taxpayers who don’t qualify for a Social Security number must use an “individual taxpayer identification number” (ITIN), which expire in groups and it is those with middle digits of 83 through 87 that expire this year.
- Start getting your tax records and documents together.
You may not like spending part of the holiday season dealing with taxes, but it is time well spent if you want to avoid surprises and lower your tax liability in April. Searching out smart tax answers is no longer just for the super-wealthy – it makes sense for everyone at every income level.