“You must pay taxes. But there’s no law that says you gotta leave a tip.” — Morgan Stanley
One of my favorite bad movies is a remake of the classic Death Takes A Holiday, newly titled Meet Joe Black. The basic plot: Death, personified by Brad Pitt, offers corporate titan Anthony Hopkins the chance to extend his life a little longer if he will act as Death’s guide and keep him interested as he accompanies Anthony Hopkins everywhere. The catch is that Anthony Hopkins can’t reveal Brad Pitt’s true identity as Death. However, in a climactic scene, Brad Pitt confesses his identity to the villain of the movie as an agent of the IRS, the only other certainty in life. I think it’s one of the movie’s best and funniest scenes.
While some may argue the IRS is as bad as Death, I think we can all agree that no one likes paying taxes. Without them, though, we wouldn’t enjoy the many government services that benefit everyone — things like the interstate highway system and increasingly accurate weather forecasting, to name just a couple. Still, there are no bonus points for paying more than you absolutely need to. With that in mind, here are few tips to make the most of tax season.
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1. Consider all the tax-advantaged benefits available through your job
Many employers offer a variety of tax-advantaged employee benefits. These include retirement accounts such as 401(k)s and 403(b)s, flexible spending accounts (FSAs), and health savings accounts (HSAs). Tax-deferred retirement accounts reduce your taxable income, as do FSAs. Retirement accounts and HSAs allow you to make contributions up to the 2019 filing deadline and still have them count for the 2018 tax year. Note that money contributed to a FSA must be spent during the calendar year — use it or lose it. However, the newer HSA vehicle has no spending requirement and offers a triple tax advantage. Not only is the money contributed deducted from your taxable income, it can be invested to grow tax-free and remains tax-free when withdrawn. Used together with a high deductible health plan (HDHP), the money in a HSA rolls over from year to year and can be used for any healthcare-related cost.
2. Decide whether to itemize or take the standard deduction
Even if you previously itemized, run the numbers and see whether the new higher standard deduction can save you money. This is especially true in light of the changes from the Tax Cut and Jobs Act which eliminated or reduce many itemized deductions. The new standard deduction is almost double than it was previously — $12,000 if you are single and $24,000 if married filing jointly. I recommend using Excel to track all of your deductibles throughout the year so you can easily tell if you should take the standard deduction or not.
3. See if you’re eligible for tax credits to reduce your tax
Even without itemizing, tax credits can reduce your bill. For example, you may be able to deduct up to $2,500 of student loan interest if you’re paying off student loans. If you’re in grad school or taking professional courses to increase your job skills, you may be eligible for the Lifetime Learning Credit. This credit could take up to $2,000 off your tax bill! These are only a few examples, there are many different tax credits you could be eligible for depending on your situation. Even if you’re working with a tax professional, I recommend you show up prepared with a list of tax credits to ask about.
4. Check your withholding rates
Did you know the average tax refund is about $3,000? That means most people are loaning Uncle Sam an extra $200+ a month. That’s money you could be putting to work for you by investing it instead. If you’re due a big refund this year, consider adjusting your withholding allowances to more closely match your actual tax bill. You can give yourself a take home pay raise and still get a refund. Check out this handy table to calculate how to fill out your revised W-4 form.
5. Save part of your refund for emergencies
It’s not the most glamorous way to use your tax refund, but the majority of Americans, no matter how much they earn, are living paycheck to paycheck. This isn’t a good idea simply because life happens and we all know debt isn’t the best option. Having a financial cushion keeps credit card providers’ and banks’ sticky fingers away from your money and makes an stressful emergency much less stressful. If you don’t already have 3-6 months of basic living expenses in a high interest savings account, use your refund to jump start your emergency fund. Even if you have this covered, it’s still a good idea to save and invest some of your refund because it could turn into way more over time thanks to compound interest. Even if it’s only a few dollars, it could still go a long way in changing your behavior.
Martha Brown Menard, PhD, is a research scientist, financial coach, and dividend income investor. She takes a smart beta approach to building her own portfolio, and likes seeing her income stream grow.