The year 2018 brought a host of changes to the tax code, leaving countless filers just as confused as they were under the old version. Here are a few tips that will help you lower your IRS bill and avoid tax-related hassles down the line.
1. Max out your retirement plan contributions
Any time you fund a traditional IRA or 401(k), the money you put in is exempt from taxation for the year you make that contribution. In other words, if you put $1,000 into your 401(k) this year, you won't pay taxes on that $1,000 of income when you file your 2018 return. Better yet, if you manage to max out your IRA or 401(k) for the year, you'll shield that much more money from the IRS.
Right now, you can contribute up to $5,500 a year to an IRA and $18,500 to a 401(k) if you're under 50. If you're 50 or older, these limits increase to $6,500 and $24,500, respectively. There's also a good chance these limits will continue to rise over time.
How much savings might you reap from maxing out? Imagine your effective tax rate is 25% and you sock away $18,500 this year in your 401(k). That would bring your actual tax savings to $4,625, which is hardly a bad deal.
2. Report all of your income
These days, side hustles are growing increasingly popular, with an estimated 44 million Americans holding down a second job. But if you're going to do work on the side, don't make the mistake of thinking you'll get to pocket your earnings in their entirety. The reality is that the IRS is entitled to a piece of all of your income, whether it comes in the form of a paycheck at work or a personal check you get from the family you babysit for. And if you fail to report your earnings, the consequences could be significant.
Any time you earn $600 or more from a given employer, you'll receive a 1099 form summarizing those payments. Don't throw those forms away -- what you may not realize is that for each one you get, the IRS also is sent a copy. If your tax return doesn't show income the agency has on file, you could land in hot water.
3. Keep accurate records
Though the recent tax overhaul did away with some deductions, there are plenty of remaining ones still in play. But don't just guess at those deductions, because if you do and you're audited, you might get caught in a dangerous lie.
The best way to avoid problems with the IRS, aside from reporting all of your income, is to list your deductions accurately, so retain all pertinent records and receipts throughout the year for the things you're likely to claim. For example, if you're a freelancer who works with various clients, you should keep a file of things like computer equipment, office supplies, and mileage to and from customer sites.
4. Hold investments for at least a year and a day
The IRS wants a piece of any money you make, and that includes profits from investments. But while you generally can't get out of capital gains taxes, you can keep them to a minimum by holding investments for at least a year and a day before selling them. Doing so will propel you into the long-term gains category where you'll be subject to a far more favorable tax rate than with short-term gains. These are taxed as ordinary income, which means you'll pay the same rate as you would on your typical paycheck.
5. When in doubt, ask a professional
A big driver of tax reform was simplifying the tax code -- or so we were all told. But if you look at the new set of rules, you'll see that they're still fairly complex.
That's why it always pays to consult a professional when you have questions about anything tax-related, whether it's filing your estimated taxes or claiming deductions on a return. Though the IRS won't generally press charges for making an innocent mistake, underpaying your taxes can result in some pretty substantial penalties, so if you're confused about a tax matter, ask someone who really knows.
Like it or not, taxes will always be a part of life. Follow these tips and you'll be more likely to save money, avoid mistakes, and make the process of dealing with taxes far less painful, on the whole.