At this point in the tax season, many Americans have already completed their 2019 returns. If you're like the majority of filers, you're now at the point where you're waiting for your refund.
But what if you're in the opposite boat -- you owe money on your 2019 taxes, and a lot of it? While owing the IRS a small amount is actually not a bad thing since it means you got access to extra money during the year, getting stuck with a larger tax bill isn't great. And if you'd rather not repeat the latter scenario next year, here are a few things you can do.
1. Ramp up your retirement plan contributions
The IRS makes it easy to save for retirement, since it offers tax incentives for doing so. If you fund a traditional IRA or 401(k), the money you contribute goes in tax-free, thereby shielding some of your income from the reach of the IRS. This means that if you're in the 24% tax bracket and put $6,000 into your 2020 IRA, you'll shave $1,440 off of this year's taxes, just like that.
Currently, you can contribute up to $6,000 to an IRA if you're under 50 or up to $7,000 if you're 50 or older. With a 401(k), you get to put in up to $19,500 if you're under the age of 50 or up to $26,000 if you're 50 or older.
2. Open a health savings account
If you're enrolled in a high-deductible health insurance plan -- defined this year as an individual deductible of $1,400 or more or a family deductible of $2,800 or more -- you may be eligible to participate in a health savings account, or HSA. If so, you get the option to contribute funds on a tax-free basis, just like with a traditional IRA or 401(k) plan, that can be used for both near- and long-term medical expenses.
HSA funds never expire, and money you don't need immediately can be carried forward to future years -- all the way into retirement, in fact. Meanwhile, you get to invest your unused funds and enjoy tax-free gains in your HSA, and you also get to take HSA withdrawals tax-free, provided that money is used for qualified medical expenses.
You can contribute up to $3,550 to an HSA this year on your own behalf or up to $7,100 on behalf of your family. And as is the case with IRAs and 401(k)s, if you're older, you get a higher HSA contribution limit of either $4,550 or $7,200. The only difference is that with HSAs, that $1,000 catch-up kicks in at age 55, not 50.
3. Sell investments at a loss
If you take a look at your investment portfolio, you may find that certain stocks or funds you own are underperforming. If that's the case, and you sell those investments for less than what you paid for them, you can use that loss to offset investment gains you take in this year, which will, in turn, lower your tax bill.
Furthermore, if your net investment loss for the year is greater than your gains, you can use up to $3,000 of it to offset ordinary income you'd normally be taxed on. And if you still have money left over after that, you can carry your loss forward and apply it to future tax years.
Don't pay more tax than you need to
When you earn money, taxes are unavoidable -- but that doesn't mean you shouldn't do whatever you can to lower them. If you increase your IRA or 401(k) contributions, take advantage of an HSA, and sell losing investments strategically, there's a good chance you'll be much happier with the outcome when you sit down to file your 2020 tax return.