If there's one thing about taxes pretty much all Americans can agree on, it's that paying less of them is better than paying more. But if you're not careful, your IRS bill could end up higher than necessary in the coming year. Here are a few reasons why.
1. You're on the hook for more Social Security taxes
You're probably aware that you currently lose a portion of your earnings to Social Security taxes (meaning, taxes used to fund the program). But if you're a higher earner, you stand to take an even larger hit in 2019. That's because the Social Security income tax cap is increasing from $128,400 in 2018 to $132,900 in the coming year. As such, higher earners will be subject to taxes on an additional $4,500 of their income.
Keep in mind that the Social Security tax rate is 12.4%, and when we apply it to an extra $4,500 of earnings, we're talking about an additional $558 in taxes over the course of the year. Now if you're a salaried worker, your employer will cover half of that amount. But if you're self-employed, you're responsible for paying the entire $558 (though you will get to deduct half of it on your tax return).
If you're a salaried employee, there's really not much you can do to avoid this increase in Social Security taxes other than perhaps divert more income to a retirement plan to shield it from the IRS. (If you're a super-high earner, however, maxing out your retirement plan might not help.) If you're self-employed, there are options for incorporating your business that might save you money on Social Security taxes, but you'll need to weigh those savings against the costs of going that route.
2. You're getting a big raise
Snagging a raise at work is a good thing in theory. The problem, however, is that a substantial increase in earnings could end up propelling you into a higher tax bracket. Under our tax system, your highest dollars of earnings are taxed at a higher rate than your lowest dollars of earnings. It's known as a marginal tax system, and it means that if your income goes from $35,000 to $50,000 and you're a single tax filer, your last $10,000 of income will be taxed at a higher rate than the rest of your income. As such, you might find that your total IRS bill goes up more than expected.
Of course, you're generally better off earning more money and paying taxes on it than earning less. But if you have a spouse with whom you file a joint return, take a look at how your increase in earnings might impact your combined tax bracket, and see if there are strategies you can employ to reduce that burden. Again, putting money into a retirement plan like a traditional IRA or 401(k) will shield some of that income from the IRS, thereby lowering your taxes.
3. You're planning to take the standard deduction without seeing what an itemized return looks like
Thanks to the 2018 tax overhaul, the standard deduction climbed all the way up to $12,000 for individuals and $24,000 for couples filing jointly. Come 2019, these figures will increase to $12,200 and $24,400, respectively. As such, a large number of filers who formerly itemized on their returns might instead opt to go with the standard deduction, since doing so could result in a higher level of tax savings.
But before you jump on that standard deduction because it's easier to figure out, run some numbers to make sure it's the right move for you. If you have a lot of mortgage interest to deduct, give a lot to charity, and spend a lot on medical bills, you might come out ahead financially by itemizing on your return after all. Seeing if this is the case is really a matter of figuring out what deductions you're entitled to and doing some math, so it's worth putting in the time to run those calculations.
Like it or not, taxes are a part of life. Be prepared for what lies ahead in 2019, and, if possible, take steps to lower your tax bill as much as you can.