The 2019 tax season for the filing of 2018 tax returns is over, but it is never too early to start thinking or preparing your 2019 tax return. In fact, it may be the best time to start thinking about next year’s tax obligations so that you don’t need to fuss when the 2020 tax season comes.
According to the Internal Revenue Service (IRS), 103,460,000 American citizens filed their tax returns during the April 15 deadline. The number was down from 103,762,000 tax filers in 2018. About 77,925,000 tax returns were processed for tax refunds this year compared to 79,100,000 last year. The total amount of tax refund processed this year was $220,762,000,000, which is 2.6% lower than the refund last year amounting to $226,558,000,000. The average refund this year was $2,833 compared to last year’s $2,864 average refund.
This year also marks the first time that taxpayers filed their taxes under the Tax Cuts and Jobs Act, which amended the Internal Revenue Code of 1986. The basic aim of the law is lowering tax rates and adjusting tax brackets so that those who earn a lower income will be taxed lower than in the past years. But personal exemptions have been eliminated. Family tax credits were also increased while itemized deductions were reduced.
Now that you have an idea what the new tax law entails, you would have a better idea on how to file your 2019 tax returns. This means that you have to employ new strategies on how to lower your tax rate—legally of course.
How was the Tax Cuts and Jobs Act?
The verdict on the Tax Cuts and Jobs Act is still out. But people are somehow looking at it on the basis of tax refund. The higher the tax refund, the better it is, so some would surmise. Going by that basis, then surely the tax amendment wasn’t that good considering that the average tax refund was down by around 1.1%.
But that is not actually a logical basis considering that everything was lower this year: from the number of tax returns filed to the total amount of tax return filed. The difference in the number of tax returns filed could have resulted in also increasing the average tax return. There are many considerations that need to be factored in before one can really say that this amended tax law is better or worse than the original.
According to a report, only 13 states experienced a lower tax refund this year. The rest of the 37 states experienced a higher tax refund with the Dakotas getting the highest refunds at 6.7% for North Dakota and 6.5% for South Dakota. The District of Columbia experienced a lower tax refund by 6.1%.
Preparing your 2019 tax return
Since you already have your 2018 tax return, you might as well dig up your 2017 tax return, which could be handy while you prepare for your 2019 tax documentation. Compare your last two tax returns, particularly the total tax you paid. That will at least give you an idea on how much you should prepare for your 2019 tax.
Another important information you need to determine is the tax liability. If your latest tax liability went down, it’s not automatically a good thing. Perhaps you didn’t withhold enough for your tax? You have to figure this thing out or there is a possibility that you would owe more in 2019. You might not be eligible for a refund if that happens.
Are you getting a salary increase this year? Or do you have a side hustle that provides you with extra income? Then you should adjust your withholding tax so that you won’t be surprised next year by the time you fill out your tax return.
It also helps if you can figure out the huge difference in your tax liability during those two years. Generally, tax liability is lower as the citizens enjoyed the benefit of the Tax Cuts and Jobs Act—that is if you measure it by states. New Jersey experienced the biggest drop with 29.1%, followed by Massachusetts with a drop of 27.6% and California with 27.1%. However, these reductions in tax liability are not felt by every household because of the different tax implications for each taxpayer.
A couple without children may be taxed higher than those without children especially if they live in a state without alternative minimum tax but has a high state and local taxes. One of the reasons for this tax imbalance is the cap on state and local income tax deduction at $10,000. This means that citizens with high property and income will pay more taxes because they can’t deduct much of their liability in their federal income tax returns. Those with children pay lower taxes because there are tax credits for parents with minor children. There is a $2,000-per-child tax credit for children under 17 years old. This tax credit is more than double the credit from the previous law.
Ways to Prepare for 2019 tax return:
Prepare your tax return in advance
Have a chat with your accountant or bookkeeper and collaborate on a plan to make your 2019 tax due more bearable. If your 2018 tax liability was quite high, then there must be something you can do about it to make your 2019 tax obligation lower. With around 10 months before tax season is here again, you actually have a lot of time to draw up a strategy to make your tax liability better. And if your 2018 tax liability is low enough, surely making it lower is only more beneficial.
Monitor your withholding tax
You can adjust your tax withholding every year, which is why you should check how much you are actually withholding from your salary every year. The Tax Cuts and Jobs Act prompted the IRS and the Treasury to adjust the tax withholding tables, which affected income taxes withheld from salaries. This is also a reason why tax refund is generally lower this year.
As early as January this year, taxpayers have complained over social media how they are getting lower tax refund than in previous years, while some are saying that they now owe the IRS some money. There were deductions that were scrapped under the Tax Cuts and Jobs Act, which should have been a go-signal for a taxpayer to increase their withholding tax. However, as it is still a new law, people were not as attentive to the changes.
Check out tax-friendly opportunities
With more than half a year to go before the next tax season, you have a real opportunity to examine tax-friendly initiatives at work. There are a couple of options like your retirement fund or the 4019(k) contribution and health savings account. Both will lower your taxable income. It is actually like hitting two birds with one stone because while your taxable income is lowered, your fund for the future is being sealed, as well as your health savings account—make that hitting three birds with one stone.
There is also that dependent care flexible account that will help you set aside $5,000 as a means to care for children under the age of 13. The amount will be on a pre-tax basis.
The amount you donate to charity will not be taxable, so it is best to plan out your donations to charitable institutions in advance. If you could spread out the donation within a year so it won’t be too heavy, then that would be great. Again, it is like hitting two birds with one stone: you get to reduce your tax due, and you get to help a charitable institution of your choice. Make sure the organization you are trying to help is legitimate, or else what’s the point?
Ask your accountant about the process of “bunching” in order to save more on your tax due. This is the process wherein a couple or more years of charitable contributions are bunched together in order for you to get a better tax deal. This way, you can itemize deductions every other year and save in bulk every other year.
Hire a tax preparer over using a tax software
So there are a number of tax software that can help you with your taxes come tax season. The advantage of tax software is that you only have to pay for it once and you can use it for a long time. As opposed to having an accountant as a retainer, this will help you save some money. Of course, during tax season, an accountant is still extremely helpful. But the tax software can be your expert during the 10 months or so of the off-tax season.
The greatest advantage of having a tax software is that your life will become easier during tax season. Usually, a tax return can be completed within days. But with tax software, the process is cut by a lot. It also helps that since you have the software months before tax season, you can input variables into the system as you get them. For example, when you donate to charity today, you can input the amount in the software and it will become part of the equation during tax season. There will be lesser chances of you forgetting a piece of information that will make a huge difference when it comes to calculating your tax liability.
Since you have time, it might be a great idea to test out a number of software before actually buying them. Most kinds of software have a free trial so you might as well take advantage of that. The IRS also has its own software called the Free File Software for those whose income is below $66,000 in a year. According to reports, about 70% of the American population is eligible for free filing.
However, hiring a tax preparer is a lot better than using tax software. Click here to know why…
Know the common tax filing mistakes
One advantage of preparing your tax return early is the chance to correct mistakes. One way to do that is to learn the most common filing mistakes that citizens commit while preparing their tax return. Here are some of them.
- Wrong Social Security numbers. This number is your identity, you should know it like you know your name. But sometimes, because you are in a hurry or you are so confident that you already memorized the number, you don’t notice that you put in the wrong number or you interchanged a couple of numbers in the series. According to the IRS, this is the most common mistakes committed by tax filers. So double or triple check the Social Security number you put in your tax return.
- Wrong name. This sometimes happens with couples. There is some confusion on what name will appear on the tax return when the couple is either filing separately or jointly. This is why it really helps when you file early.
- Multiple filing statuses. This usually just happens with paper filing, seldom with online filing.
- Forgetting to sign the tax return.
- Calculation errors. This could happen whether we make our own calculations or whether we use an online software to do the math. The thing with the software is that it is still dependent on the numbers that humans input into the system. Once a number is wrong, the entire equation will suffer. Without the software, the taxpayer could make a mistake in both recording and calculation.
- Wrong account number. If you put in the wrong account number in your tax return, chances are your tax refund will be delayed. It is actually very easy to prevent, and with time on your side, this mistake should really be avoided.
- Claiming ineligible dependents. You might write down dependents who have already lost their dependency status. Such mistake could have dire consequences for your tax situation as it may be taken as fraud.
- Failure to file a tax return on time or the failure to ask for an extension to file a tax return.