It is never too early to think about your income taxes. In fact, the end of the year is the perfect time to be sure that you are taking advantage of tax savings. If you let the year closeout without this type of planning, you risk throwing away money that could be back in your pocket.
As you near the end of the year, ask yourself these questions and consider how they will affect your bottom line.
Should I Itemize or Take the Standard Deduction?
The simple answer to this question is that you should itemize if it will increase your overall deduction. In some situations, you may not be able to take the standard deduction, either.
The type of deductions you take will have a significant impact on where you can save money. If you rely on the standard deduction, for example, then a lot of the information you would need to keep if you itemized simply is not relevant or necessary.
Itemized deductions include:
- Medical and dental expenses
- State and local taxes (including real estate taxes and personal property taxes)
- Home mortgage interest
- Investment interest
- Charitable gifts
Medical and dental expense deductions are limited. For 2019, you are only permitted to deduct the expenses that exceed 10% of your overall income.
The 2019 standard deduction, on the other hand, is $24,400 for those filing married filing jointly or $12,200 for those filing single or married filing separately. Head of household’s standard deduction is $18,350. There are additional deductions available to those who are blind or over the age of 65.
Knowing these numbers is an integral part of the decision-making process. If you do not think you will have costs that are above the standard deduction, then there is no need to track itemized expenses.
However, if your itemized costs will be over the standard deduction, then you can use the last few months of 2019 to increase that type of spending. Increase your gifts to charity, pay ahead on your mortgage, or go through that elective medical procedure you have been considering to take full advantage of this type of tax savings.
Do You Know Your New Tax Bracket? Do You Have the Option to Defer Income?
Income tax is, of course, based on your income. If your income is higher, that could push you into a higher tax bracket. That means that you will have to pay more in taxes overall. If you are on the edge of going to a higher tax bracket, you may want to consider your options for deferring your income into 2020.
The Tax Cuts and Jobs Act of 2017 made significant changes to the tax brackets, and understanding where you may fall can help you decide if deferring income may be a good option for you. For 2019, for example, if your income as a single person is getting closer to $84,200, you may want to look at deferral options because $84,201 will move you from the 22% tax rate to 24% tax. The jump is even more significant if you are teetering around $160,725 because at $160,726, your tax rate increases from 24% to 32%.
Deferring income is not an option for everyone, but you may be able to do the following to help.
- Request that bonuses be paid in 2020, rather than 2019
- Wait to cash out investment or retirement payments (unless you must take mandatory minimums)
- If you own your own business or work as a freelancer or consultant, delay billing until later in the year to increase the likelihood that it is paid in 2020
- Take capital gains in 2020 rather than 2019
Keep in mind that efforts to defer income really only make sense in the context of keeping you in a lower tax bracket. If your efforts do not change your tax bracket, you may not need to worry about deferring income.
Do You Know Your Tax Payment Deadlines?
Planning ahead for payments can help you avoid interest and penalties from the IRS. For most individuals, tax payments are due by April 15 of the following year, unless you requested an extension. If you know you are going to have to pay in, make arrangements now to have that money available.
While the standard individual deadline is often considered common knowledge for tax-knowledgeable individuals, keeping up with self-employment tax deadlines can be a bit trickier.
All the estimated tax payments for 2019 have now passed—the last deadline was September 15. Missing these deadlines can end up costing you underpayment penalties when you file your 2019 taxes toward the first part of 2020.
Getting Help with Year-End Tax Planning in Connecticut
Tax planning in Connecticut is generally focused on federal tax savings. However, you can also take steps to maximize your tax refund on your state return as well, and we can help with that process.
Everyone’s tax situation is different. Contact our office if you have questions about your unique financial circumstances. We are happy to review your previous year’s taxes and discuss your current situation to make suggestions on how you can use the rest of this year to your advantage. If you’d like to have a consultation, please give us a call at 203-634-7549 or fill out our contact form and someone will get in touch with you.