Nothing says, “Welcome spring!” like daffodils, pollen, baby bunnies, and (perhaps) cutting a big check to the IRS. Conversely, many people purposefully overpay their taxes, so they receive a refund after filing. This is problematic as well. Even if you save (or invest) your refund, you may be inadvertently costing yourself money by not consistently saving over the year. If we believe that over time, the stock market trends upwards (as it has historically, though historical returns are not a guarantee of future performance), then you could be missing out by only investing once a year with your tax refund.
So, what can you do to minimize your taxes and work with your refund? Here are four tips to better manage your taxes.
1. Adjust your W-4 withholdings.
If you receive a large refund, adjust your W-4 withholdings to pay less in taxes over the year and instead direct that money to your 401(k) or IRA. If you owe a lot in taxes, you can reduce the sting by increasing your W-4 withholdings. Many dual-career couples get hit with a tax bill each April. You can minimize this by tweaking your withholdings or paying extra in taxes each paycheck.
2. Fund your healthcare savings account.
Did you know you have until you file your taxes to fund an HSA for the previous tax year? If you have a qualifying high deductible healthcare plan and you didn’t max out your healthcare savings account (HSA) in 2019 ($3,500 for a single person in 2019; $7,000 for a married couple) there’s still time to save money for your future and on your taxes. If you have already filed for 2019 but you aren’t taking advantage of this opportunity for 2020, reach out to your human resources department and start contributing today. If your human resources department can’t edit your HSA contributions outside of open enrollment, you can open and fund an HSA on your own. Just be careful you don’t overfund an HSA if your employer (or your spouse’s employer) contributes to one on your behalf.
3. Fund a SEP IRA for business owners.
Just like an HSA, self-employed individuals can fund a SEP IRA up until their filing deadline. Talk to your CPA or financial planner about how much money you can save in a SEP IRA and whether or not you have to fund one for your employees. SEP IRAs are a great way for business owners to build wealth outside of their business and reduce their income taxes. 401(k) plans may also be a good option for 2020 depending on your business.
4. Don’t forget your VA 529 contributions.
Be sure to provide your tax preparer with your 2019 Virginia 529 college contributions to see if you are eligible for a Virginia state income tax deduction. The deductions go to the account owner, so even money that was gifted by a grandparent could create a tax deduction for you.
Taxes are one of those things people tend to ignore until it comes time to file. Time spent planning your taxes can result in big savings and even wealth creation opportunities if you make changes to the way you save money. This is why we always go through a tax-planning process for clients and why you should talk to your CPA or tax preparer.
This year and next, tax prep for many will be more complicated due to the impact of the COVID-19 pandemic. As of press time, the federal filing and payment deadline for 2019 taxes has been extended to July 15. The Virginia filing deadline is still May 1, but the payment deadline has been extended to June 1.