Many people are still in shock after filing their 2018 federal and state income taxes. Because the new federal tax law — the 2017 Tax Cuts and Jobs Act — reduced marginal tax rates, many people expected a refund would be coming their way. But for some high-income households, that turned out not be the case.
Get More Taken Out of Each Paycheck.
Those who receive a W-2 form can contact their employer and change the amount of tax deducted from each paycheck for the remainder of 2019. For example, a married person can claim “Married, but withhold at higher Single rate” and 0 allowances on their Form W-4 payroll withholding form, which will increase the amount of tax taken out of each paycheck.
Set Aside More from Any Bonus or Stock Award.
Employers often don’t withhold enough money from these one-time payments, causing people to underestimate how much they need to pay in taxes. Companies usually take out 22% for federal taxes on bonuses and stock awards, but if you are in the 37% tax bracket, you will owe more.
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Adopt a Strategic Approach to Charitable Giving.
For those who didn’t get the tax benefit of charitable deduction in 2018, consider setting up a Donor Advised Fund (DAF). A DAF enables a person or couple to essentially prepay their charitable contributions for the next few years by setting aside this money in the DAF now. You can decide how much and to which charities to donate the money to over the coming years, while receiving all of the tax benefit this year.
For example, a married couple filing jointly that normally makes $20,000 in annual charitable contributions can set up a DAF and “lump” their contributions by giving $60,000 in 2019 to be distributed over a three-year period. By combining their $60,000 contribution with a $10,000 deduction for their local and state income taxes, they could deduct $70,000 on 2019’s federal income tax returns. In 2020 and 2021, they will take the standard deduction allowed by law, which is currently $24,400.
Fully fund 401(k) and Health Savings Accounts.
In 2019, people ages 50 and older can contribute up to $25,000 to their 401(k); those under age 50 can contribute up to $19,000. People with a high-deductible medical insurance plan should contribute money to their Health Savings Account. Individuals can contribute up to $3,500; couples can contribute up to $7,000; and those age 55 and over can contribute an additional $1,000.
Business Owners Need to Do the Same.
Professionals, sole proprietors and other business owners need to contribute to retirement plans for the self-employed. These include SEP IRAs, which allow a person to potentially contribute up to $56,000 on a before-tax basis in 2019. Solo 401(k) plans and defined benefit contribution plans often allow a higher tax-deductible deposit.
Contribute to a 529 College Education Plan.
Some states allow taxpayers to contribute to these plans and receive a deduction on their state income taxes. In Georgia, for example, a married couple can receive a deduction on state income taxes for contributions up to $4,000 per child.
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