When it comes to taxes, it's never too early to start planning. Although 2019 isn't quite over yet, planning for tax season now can give you a big advantage when it comes time to file. Here are a few key ways to make tax filing smoother come 2020.
1. Re-consider your retirement account contributions, and increase them, if possible. 401(k) contributions reduce your AGI (that's adjusted gross income, or the amount of income on which you pay taxes). Increases toward your annual contribution limit, which will increase from $19,000 to $19,500 in 2020, reduce taxable income. If you're self-employed, or have self-employed income in addition to regular W-2 income, consider opening a solo 401(k) to further reduce your AGI and protect your financial future.
2. Start organizing your receipts and other essential documents in preparation for next year's tax filing. Consider apps such as Shoeboxed or Expensify for digital safe-keeping and organization of your receipts and expenses. Now is also the time to request itemized receipts from donations, certain work-related expenses, health-care costs, or any other foreseeable deductions you may wish to take.
3. Estimate whether you'll have enough deductions to itemize. If your deductions don't yet approach the $12,200 benchmark for single filers or $24,400 for those married filing jointly, consider where you can find additional deductions. One great idea: The holidays are the perfect time for charitable donations, which can be added to your overall deductions total if properly itemized.
4. Consider the impact of any changes to your household this year. That includes new dependents, a divorce, or any other event that might impact your filing status. Contact with your HR department or use an online tax calculator to help inform whether you need to change your withholding levels, or make any other necessary changes based on your new filing status.
5. Review your withholding status. If you believe you'll owe taxes for 2019, you can always opt to withhold more now, such as seeking a higher withholding rate on a year-end bonus. You can also opt to start saving now for any expected tax bill. And if you believe you'll receive a refund, now's also the perfect time to determine what you'll do with it. My advice: save it if you don't yet have a solid emergency fund, or otherwise, apply it toward any high-interest debt.
The fact that tax season isn't yet upon us gives you a distinct advantage. Getting a leg up on your taxes will benefit your overall finances.
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