The end of the year is fast approaching and April 15 is just around the corner.
And we all know what that means: Taxes.
“Don’t overlook available tax credits,” said Gary LeDonne, executive in residence at West Virginia University’s John Chambers College of Business and Economics. “Credits reduce the taxpayer’s liability dollar for dollar.”
This is especially critical since Congress passed the Tax Cut and Jobs Act in 2017. In a nutshell, TCJA affects most taxes, including individual, corporate partnerships and pass-through entities and even tax-exempt organizations, such as churches and nonprofits.
Other major changes include:
— The elimination of both personal and dependent exemptions.
— Elimination of deduction for moving expenses, with some military-related exemptions.
— Increased child tax credit.
— Reduction of top marginal corporate tax rate from 35% to 21%.
— Increased standard deduction.
“For individual taxpayers, properly funding IRA and, or 401k plans are at the top of my list,” LeDonne said. “These tax advantaged retirement plans can save taxpayers money today while saving for tomorrow’s retirement needs. Many retirement plan contributions can be made after Dec. 31. The due date for IRA and 401k contributions is April 15, 2020. Contribution limits vary based on the taxpayer’s age. For business owners and corporations taking full advantage of accelerated depreciation and business-related tax credits can substantially reduce the tax burden.”
LeDonne said the end of the year is a good time to think about charitable giving, another way to reduce income tax. Contributions can be made in cash, or with a tax deduction for any non-cash donations.
“It’s important to remember taxpayers can also deduct the value of non-cash gifts such as appreciated stocks, used household goods and clothing, even used cars are acceptable,” he said.
“Contributing appreciated stock is a highly effective tax planning strategy.”
Many taxpayers might qualify for credits related to education-related expenses, child care and taxes paid to foreign countries.
“The credit provisions are complicated and some credits phase out for higher income taxpayers,” he said. “Some credits such as Earned Income are fully or partially refundable.”
Both Health Savings Accounts and Flexible Savings Accounts can save taxpayers money by using pre-tax earnings to pre-pay medical costs. The HSA, however, is a more attractive option when it comes to tax savings, LeDonne said.
“The money set aside doesn’t have to be used by the end of the year,” he said.
Plus, if the taxpayer changes jobs, the HSA is portable.
“In order to qualify for a Health Savings Account, the taxpayer must have a high deductible health insurance plan,” he said. “Contributions to a Health Savings Account for 2019 must be made by April 15, 2020.”
LeDonne said the most common mistakes people make when looking at year-end taxes are twofold — clerical errors related to inputting information on the tax form, or selecting the wrong filing status.
“Remember tax software is only a tool. If the user inputs bad data, the results will be wrong.”
And lastly, be prepared for a possible audit.
“Audit readiness is always an important thing. Make sure that you have all your documentation. The statute of limitations is three years, and so from the time you file the return to the due date of the return, whichever is later, you need to make sure you maintain your documentation.”
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