April 15th may seem far off, but once school starts and the holiday season rolls around, tax preparation may be the last thing on your mind. Those who have experienced significant life changes, individuals with Flexible Health Spending Accounts, and high-income earners could especially benefit from the extra planning time to improve their income tax strategy. Why not take advantage of these longer summer days by getting some year-end tax-saving tasks out of the way now?
Should You Adjust Your Pre-Tax Withholding?
In 2018, the Trump administration enacted some major tax laws that taxpayers felt in diminished income tax refunds or higher payments this past tax season. As a result, the IRS is now encouraging taxpayers to check their current withholding to adapt to the ramifications of these changes.
Major lifestyle changes like marriage, divorce, or a change of jobs can also significantly impact your tax liability. In order to avoid a significant bill or a large refund, you’ll need to check your current withholding status. As a general rule of thumb, the ideal situation is when you neither owe the IRS nor receive a refund. The IRS provides a Personal Allowances Worksheet to estimate how much you’ll need to withhold throughout the year to avoid over or under paying.
Do You Have Flexible Spending Account (FSA) Dollars Remaining?
If you contribute pre-tax funds into your Flexible Spending Account to cover qualified medical expenses, the summer could be a good time to check how much you have used, how much you have remaining, and decide how you will spend any extra funds.
Although the U.S. Treasury department’s rules have changed regarding the old “use it or lose it” regulation for FSA accounts, the rollover allowance or grace period for use are up to the discretion of the employer. Companies have one of three choices: (1) offer up to an additional 2.5 months for employees to use their funds, (2) allow employees to roll over up to $500.00 of unused funds into the next plan year, or (3) none of the above. An employer can choose to allow a smaller rollover amount or shorter grace period, so you’ll want to double check your company’s policy to ensure you don’t forfeit pre-taxed funds.
Should You Increase Your Retirement Contributions?
Contributions made to traditional IRA accounts, such as non-Roth IRAs and workplace 401(k) s, are funded with pre-tax dollars, which means any contributions made will be taxed in the year the contributions are made. Not only could maxing out your annual contributions to these accounts help to reduce your income, they also offset other tax liabilities such as monies owed on capital gains.
Check to see if you and your spouse are on track to make the maximum IRA contributions of $6,000 ($7,000 for individuals over age 50) in each of your accounts while you still have plenty of time left in the year to catch-up.
Even the most prudent tax-planning strategies will fall short if not executed on time. By checking your pre-tax withholding, FSA balance, and retirement contributions in advance, you have plenty of time to make significant adjustments to each without the added stress of a looming deadline.