Everyone hates taxes! It’s possible to never pay taxes again. Here are four simple ways to pay less taxes in 2019!
Disclaimer: I am not a licensed Certified Public Accountant, and this article is for educational and entertainment purposes only. Please consult a CPA and perform your own due diligence before making any tax-related decisions.
1. Traditional 401(k)
In 2019, employees can contribute $19,000 towards their 401(k) plans (if your employer has one), and individuals over the age of 50 can make $6,000 in additional “catch-up contributions”.
These “catch-up contributions” are focused on allowing near-retirees to make larger contributions to their retirement savings plan.
They provide the opportunity to make $25,000 in contributions in one year. How do these contributions limit your tax liability?
Traditional 401(k) contributions are made on pre-tax basis, and decrease taxable income. (Roth contributions are post-tax.
Read this article for more information about Roth IRAs).
Here’s an example of two people in the exact same financial position, and the only difference is 401(k) contributions. For simplification purposes, we will assume an average effective tax rate of 25%.
This is not 100% accurate because tax amounts vary based on filing status, allowances, and other deductions.
Joe was able to save himself $4,750 in taxes ($19,000*.25) compared to his friend, Adam. In fact, you can you use the equation (pre-tax contribution*average effective tax rate) to determine the tax savings on any pre-tax contribution.
2. Traditional IRA
On top of individuals being allowed to contribute $19,000 to their Traditional 401(k), the IRS also allows $6,000 a year in IRA contributions ($7,000 if you’re over 50 for “catch-up contributions).
These Traditional IRA contributions work exactly the same as the 401(k) contributions discussed above.
The contributions, however, will not be made through an employee-sponsored plan. They will have to be included on your annual tax return to yield the tax saving.
Using the same 25% tax rate above, a $6,000 Traditional IRA contribution provides a tax savings of $1,500 ($6,00*.25).
3. Health Savings Account
A health savings account (or HSA) is my favorite, and probably the most under-utilized, tax saving tool.
The IRS allows $3,500 in HSA contributions for single individuals and $7,000 for families.
According to Investopedia, health savings account “contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs”.
The best advantage of an HSA is that the money is NEVER taxed. Yes, you heard that correctly!
The money is not taxed when contributed, and you do not pay additional taxes when you spend the money on any qualified medical expenses.
A $3,5000 HSA contribution provides a $875 ($3,500*.25) tax saving. Additionally, it is probable that you will have medical expenditures at some point in your life.
You might as well spend that money in the most tax-efficient way possible!
4. Standard Deduction
The standard deduction, especially after recent United States tax reform, is a major source of tax savings.
It provides a $12,200 tax deduction for single individuals and $24,400 for married couples.
You do not have to do anything to receive the standard deduction! All income earners are allowed to claim the standard deduction.
Some individuals can itemize additional deductions. We will not further discuss itemized deductions for the purpose of this article, but you can read more about them here.
The $12,200 standard deduction provides a $3,050 ($12,200*.25) tax saving.
This means that an individual making $40,700 or less could pay no federal income taxes if they contribute $19,000 to their Traditional 401(k), $6,000 to their Traditional IRA, $3,500 to an HSA, and take the $12,200 standard deduction.
This individual will still pay state income taxes, Medicare, and Social Security.
Everyone hates taxes,so avoid them! It’s possible to never pay taxes again. Use these four simple ways to pay less taxes in 2019!
Always consult a CPA and do your own due diligence before making any tax-related decisions. Check out my other articles on investing, early retirement, money management, and retirement planning!