Whether you've filed your 2018 tax return already or are still in the process of putting it together, you probably have one goal: to pay less tax this year than you did the previous year. The good news is that there are a number of strategies you can employ to lower your tax burden, so it pays to give the following a try.
1. Max out your IRA or 401(k)
You've probably heard that it's important to save for retirement (you know, so you'll have a means of paying the bills when you're no longer working). And if you make contributions to a traditional 401(k) or IRA, the money you put in won't be subject to taxes, and as such, will lower your tax burden.
For the current year, you can fund your IRA with up to $6,000 if you're under 50, or $7,000 if you're 50 or older. If you have access to a 401(k), you can contribute up to $19,000 if you're under 50, or $25,000 if you're 50 or older. Your savings, meanwhile, will be a function of your tax rate, but if you fall into the 24% bracket and manage to put $19,000 into a 401(k), your taxes will automatically go down by $4,560.
2. Sell investments at a loss
Your portfolio is apt to have investments that aren't performing as well as others. If you have a bad investment on your hands, selling it for less than what you paid for it is a great way to reduce your tax burden. For one thing, you can use that investment loss to offset any capital gains you realize this year. Additionally, if your net investment loss for the year exceeds your net gains, you can apply up to $3,000 of the amount left over to offset your ordinary income, and then carry the rest of that loss forward into 2020.
Imagine you take a $5,000 loss on an investment this year, and only have $1,000 in gains. You can then use $3,000 of that loss this year to offset your regular income, and then carry the remaining $1,000 into next year.
3. Track your mileage
If you're self-employed and use your personal vehicle for work purposes, you can deduct your mileage provided you keep a detailed log of where you go, who you visit, and why. The standard mileage rate for 2019 is $0.58, which means that if you drive 2,000 miles this year in the course of your job, you'll get to claim $1,160.
4. Keep detailed records of your medical bills
Have a lot of medical bills? They might help lower your taxes, provided you keep track of them. For the current year, the IRS will allow you to deduct medical expenses that exceed 10% of your adjusted gross income (AGI). This means that if your AGI is $60,000, and you spend $10,000 on medical expenses, you get a $4,000 deduction. Keep in mind, however, that you'll need to itemize on your tax return to claim your medical expenses, and with a fairly large standard deduction, that may not make sense.
5. Fund an FSA
If your employer offers you the option to participate in a flexible spending account (FSA), it pays to sign up. FSAs come in two varieties: health and dependent care. You can use the former to pay for things like doctor visit copays, prescription drugs, eyeglasses, and certain medical supplies and equipment. And for the current year, you can contribute up to $2,700 in pre-tax dollars to do so. Your savings, therefore, will be similar to that of a traditional IRA or 401(k) as discussed earlier.
Meanwhile, the contribution limit for dependent care FSAs is substantially higher at $5,000. You can then use those funds to pay for things like day care, after-school care programs, or summer camps so that you can work or look for work.
6. Set up a home office
If you're self-employed, it pays to make your home your primary place of business. The reason? A home office could serve as a sizable tax deduction this year.
To qualify, you must have a dedicated space in your home allocated for work purposes, and that office must be your main place of business. If so, you can either deduct $5 per square foot of office space up to a maximum of 300 feet, or $1,500, or you can total up your home expenses and deduct the amount that's proportionate to the amount of space your office takes up within that property. The latter option might sound complicated, but essentially, if you spend $20,000 on home expenses like heat, electricity, and water, and your office takes up 10% of your home, you can deduct $2,000.
Lowering your taxes often boils down to making smart choices. Follow these tips, and hopefully, you'll have more to celebrate when you file your 2019 return.