Last updated on April 1st, 2020
Since the IRS started accepting individual returns for 2019 on January 27, tax season is officially well underway. And with tax returns due by April 15 for everyone who’s required to file taxes, liability is on everyone’s mind—whether you owe the IRS or you’re expecting a tax refund.
Maybe you’re simply interested in minimizing how much you have to pay to the government for 2020. Perhaps you realized that your income through December 31, 2019, set you into a higher tax bracket. Sometimes, as you’re pulling together your documents and figures for the past year or brushing up on tax policies and guidelines as you start preparing to file, you realize that you owe more than you thought you did.
Of course, 2019 is over, and so you may be inclined to think there’s nothing more you can do to affect how much you owe for that year. The good news for you is that even though we’re in a new calendar year, there are still a few actions you can take to reduce how much you owe the IRS, and possibly even save some of your money for the future.
This article aims to set some resources—that you may not be aware are available to you—on your radar so that you can look into them further. None of this content is intended as tax advice, but rather as educational resources and material with which you may consult as you consider taxes. A consultation with a tax professional is your best bet for advice.
But, working in finance exposes you to tools that you might not have known about otherwise; we’re aiming to share those tools here so that you can examine them further. Let’s look at some of the money moves you can make now, in 2020, to reduce how much you owe Uncle Sam for 2019.
1. Invest in a Conventional IRA.
IRAs can be a helpful tool both to save for retirement as well as to take control of your tax situation.
You generally have until April 15, 2020, to make contributions to your IRA accounts and have them count towards your 2019 tax return. Outside of Roth IRAs, these contributions grow tax-free and are not taxed until distribution. In fact, you could deduct these untaxed IRA contributions from your taxes.
There are some exceptions where you could have even more time beyond the April 15 deadline. If you file an extension, you can actually contribute to a Keogh or SEP IRA through October 15, 2020.
Your choice of IRA type for these contributions affects how much you can contribute, and therefore is an important consideration. For 2019, the IRS caps total individual contributions to all raditional and Roth IRAs at $6,000 ($7,000 if you’re over the age of 50).
A SEP IRA might be a strong alternative to consider not just the later deadline already mentioned, but also given its higher contribution limits. Usually favored by small business owners or the self-employed, individuals can contribute whichever amount is smaller: $56,000 or 25% of their annual compensation (this increases to $27,000 in 2020).
2. Buy assets—but in a self-directed IRA.
Putting aside your interest in reducing your taxes, have you been thinking about buying assets like cryptocurrency, but you don’t want to deal with crypto taxes, capital gains, elaborate documentation requirements, and so forth? And, since you’re reading this article, you’ve also been tempted to reduce your tax liability.
A self-directed IRA (SDIRA) could be your answer.
A conventional IRA only holds a limited set of IRS-approved assets like mutual funds, bonds, and stocks that are approved by the financial institution that is the custodian. On the other hand, a SDIRA can hold any of the IRS-approved assets. SDIRAs can come in many of the same types as conventional IRAs, including Traditional, Roth, SEP, and SIMPLE, and leverage the same tax benefits.
You can buy alternative assets like cryptocurrency or precious metals within an IRA using funds you contribute, whether directly or through a transfer or rollover from other accounts. Then, you can enjoy the same benefits and limits on your contributed funds—tax-free contributions, no taxes until distribution, same deadlines, same contribution limits, etc.—as you would with the same type of conventional IRA.
So, you can buy crypto in an IRA using the funds you placed into a (for example) SEP SDIRA, and enjoy the same $56,000 or 25% of annual compensation contribution limits noted in our first point when we were reviewing a conventional SEP IRA.
3. Maximize your health savings account (HSA).
If you have a high-deductible health insurance plan, you’re likely already familiar with HSAs. These accounts let you save money on a pre-tax basis. You can then withdraw as needed to pay for medical expenses. Your plan can provide you with the list of approved expenses.
The deadline for 2019 HSA contributions is April 15, 2020, so you still have time to contribute.
The 2019 HSA Contribution limits are $3,500 for individual plans and $7,000 for family plans, with an additional $1,000 permitted for individuals aged 55 and up.
4. Gather up receipts and optimize your deduction strategy.
You can deduct certain approved expenses from your income taxes, following one of two strategies. The strategy you pick should be based on what has the greatest impact on lowering your 2019 income, because that number is what’s used to calculate your taxes.
You can either take a standard deduction, where a fixed amount is subtracted from your income during tax calculation, or you can itemize your deductions, where you sum up your actual expenses from what’s eligible for deduction. It can be easier to just take the standard deduction, but if an individual has incurred many tax-deductible expenses, itemizing can make more sense.
5. Hire a tax professional.
This one may seem counterintuitive. Ultimately, by reducing your tax liability you are trying to reduce your spending. Why would you want to incur additional costs?
A tax professional can help you pinpoint deductions that you might have missed. These pros are up-to-date on the current tax policies, and so they can give you advice that marries your situation with real-life best practices and keep your filing accurate. They can help make sure that whatever you’ve included in your return follows the rules, from deduction eligibility through contribution limits, and they can help make sure yu’ve exhausted all of your options. A tax professional can even help you plan for the upcoming tax year.
Because you are adhering to best practices when working with a tax pro, you will also be reducing any risk for penalties or audits of your returns. This in turn will save you time, stress, and money in the long run.
For the answers to your specific tax questions, you should consult directly with a licensed tax professional who can review your particular situation. However, getting familiar with your options will make it easier for you to pinpoint the questions you need answered.
Now that you know you can still take action to reduce your 2019 taxes—and even save for retirement and future health costs—you can start working toward making the best decisions for your finances.