With tax season just around the corner, Americans are gearing up for what can be a very stressful time of the year. It is safe to say that for many, taxes can get downright complicated. As Max Baucus once remarked, “tax complexity itself is a kind of tax.”1 The average American is no tax expert and may find it difficult to navigate all the ways that they can save.
In fact, for many individuals, filing their taxes is the closest look that they have taken at their finances for the whole year. Some may even find themselves surprised at the result of their return and blindsided by the ways that they could have saved more on taxes had they just known how.
Fortunately, there are ways that you can learn from last year’s tax return to benefit yourself in the coming year. By taking a look at your previous tax return and doing some strategic planning for the year to come, you can find ways to save more on your taxes. Below, we’ll talk more about how you can use last year’s tax return to help you better plan for the coming year.
1. Assess your income needs.
The first step you will need to take when looking at last year’s tax return and planning for the year to come is to access your income needs. How have they changed from last year to this year? Do you have any significant cashflow changes? Your income will play a significant role in the taxes that you pay for next year, and it’s important to understand how this fits into the new tax brackets for 2019.
Each year, the IRS adjusts the tax brackets to account for inflation. Up until 2017, this indexing was based on changes in the Consumer Price Index. However, as part of the Tax Cuts and Jobs Act of 2017, the indexing will be based on the Chained Consumer Price Index starting in the 2019 tax year. These new 2019 federal tax brackets and rates have increased by about 2% across all income brackets.
2. Understand tax planning opportunities available.
If you want to save on your taxes next year, you’ll need to understand the available tax planning opportunities and how they can benefit you. Here are just a few ways you can work now to save on taxes in the future:
Minimize phantom and phantom-like income.
Phantom income is an investment gain that hasn’t yet been realized through a sale or cash distribution. This typically applies to small business owners and to certain bond or real estate investors. Though you do not receive the cash from the asset, you still have to pay taxes on it.
Phantom-like income occurs from unused or unneeded interest, various mutual fund distributions, and unplanned capital gains. If you aren’t vigilant, you only find out about the taxable amount when you receive the 1099, at which point it is too late to do anything about it.
By minimizing phantom and phantom-like income, you can also minimize these taxes. Assess any unneeded interest or excess capital gains and consider tax loss harvesting or owning these investments in tax preferred accounts to minimize this taxable income.
Control taxable income.
There are also some ways that you can control your taxable income, thus minimizing your taxes due. These include strategies such as deferring distributions, maximizing retirement plan contributions, leveraging QCD (Qualified Charitable Distributions), and staggering sales on highly appreciated capital gain type assets. Ultimately the control comes from developing a good income and pension strategy.
Maximize deductions.
You’ll also want to consider all of the ways that you can maximize your tax deductions. Itemize items when possible, and be sure to keep all of your receipts. Remember, you should also write off any charitable giving such as donations to non-profit organizations.
These are just a few of the tax planning opportunities that you can use to minimize your taxes on your 2019 filing. Speak with a tax professional about what other options may be available to you, and use them to your advantage this year.
3. Plan accordingly, and take action.
So what do you do with all this information you’ve gathered based on last year’s tax return? Once you’ve accessed your income needs and started to understand what tax planning opportunities are available to you, it’s time to plan for success. Consult with a tax preparation specialist and consider what actions you can take this year to reduce your taxes on your 2019 filings.
As Tony Robbins says, “The path to success is to take massive, determined actions.”2 It’s not enough to just make plans, you’ve got to act on them if you want to benefit from tax savings on your 2019 return. Keep your mind focused on the bigger picture, then create a plan and execute on that plan to reap the benefits for next year.
Want to make sure you’re on the right track to leverage last year’s return? Call CM&A now for a 30-minute consultation with one of our financial advisors: (262) 790-9966.
Sources:
- Sourced from Inc.com.
- Sourced from Entrepreneur.com.