Taxes are a complicated matter, so with a new year approaching, it's smart to look out for some of the pitfalls filers commonly face. Here are a few mistakes you might be at risk of making next year -- and how to avoid them.
1. Neglecting your IRA or 401(k)
IRAs and 401(k)s can be instrumental in not only helping you save for retirement, but lowering your taxes along the way. That, however, assumes that you contribute to one -- an estimated 21% of Americans don't.
Any funds you contribute to a traditional IRA or 401(k) go in on a pre-tax basis, and your associated savings are a function of your effective tax rate. If that rate is 30%, and you contribute $5,000 to either type of account, you'll shave $1,500 off your 2019 tax bill, just like that.
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In 2019, workers under 50 will be allowed to contribute up to $19,000 annually to a 401(k) and $6,000 to an IRA. Those 50 and older, meanwhile, get a catch-up provision that raises these limits to $25,000 and $7,000, respectively. If you can't max out your IRA or 401(k), do your best to contribute something so that you take advantage of the tax breaks involved. You can open an IRA at almost any financial institution or sign up for a 401(k) through your employer, provided your company offers one.
2. Not making estimated quarterly payments
Side hustles are all the rage nowadays, with an estimated 44 million Americans working some sort of second gig. But if your side hustle pays you as an independent contractor, you won't have taxes withheld from those earnings, which means you'll be responsible for making estimated quarterly payments to the IRS throughout the year. Fail to make those payments along the way, and you could end up on the hook for some serious penalties for it.
3. Assuming you won't itemize
Now that the standard deduction is roughly double what it was prior to 2018, a large number of tax filers who used to itemize on their returns will likely stop doing so. But don't assume that you won't be itemizing just because the standard deduction has gone up. If you pay a lot of mortgage interest, have high state and local taxes (including property taxes), and rack up a large number of eligible expenses, like medical bills, you might come out ahead financially by itemizing on your return after all, so save those receipts from doctor visits, charitable contributions, and anything else that might serve as a tax deduction for you.
4. Forgetting to take your RMD
The money you have in your IRA or 401(k) can't just sit there untouched forever. Once you turn 70 1/2, you'll need to start worrying about required minimum distributions, or RMDs. The specific amount of your RMDs will depend on your account balance and life expectancy each year they come due, but if you fail to take them as scheduled, you'll face a 50% penalty on whatever amount you neglect to remove from your account. This means that if your RMD one year is $5,000 and you don't take it, you'll lose $2,500, just like that.
Your first RMD is due by April 1 of the calendar year after the year you turn 70 1/2, so if you turned or are turning 70 1/2 at any point in 2018, you'll need to take your initial RMD by April 1, 2019. Mark that date on your calendar, because if it slips on by, you could be out a serious chunk of money. At the same time, remember that your RMD will, unfortunately, be subject to taxes. This isn't a penalty; it's the same taxes that apply to any traditional IRA or 401(k) withdrawal you take.
Falling victim to the above tax mistakes could have serious financial consequences. Steer clear of them, and you stand to save more of your money in 2019.
