For most people, thinking about taxes ends the day they submit their returns to the IRS. While many Americans may be eager to put away their financial records, now is actually the perfect time to plan for the future. Instead of the standard practice of file-and-forget, the Pennsylvania Institute of Certified Public Accountants (PICPA) encourages Americans to use the information in their tax return to develop a plan that will put them on the path to reaching their financial goals.
Taxes and Financial Planning Go Hand in Hand
Understanding how taxes impact your earnings and savings is a key part of any financial plan. Your tax return serves as a great starting point. Within a return, you can see the details of cash flow, important investment information, and insights about your progress saving for retirement. And given that the 2018 filing season was the first year to reflect the majority of changes resulting from the Tax Cuts and Jobs Act, it’s a perfect time to revisit your financial plan while all your documents are out and in one place.
By not updating your financial plan, you may be leaving money on the table that could be used toward your children’s education, the family’s health care savings, or retirement. What’s more, having a financial plan and sticking to it will help you feel more confident as you work toward your goals. It will also go a long way toward ensuring that you don’t owe Uncle Sam a big check come next year’s filing season.
While tax law has a direct correlation on how much Americans owe the IRS in any given year, life events such as having a child, getting married or divorced, or buying or selling a home also play a major role in determining your tax situation. Changing jobs, moving, and being struck by natural disasters also could have a big impact, so it is important to understand and adjust accordingly.
Tax Savings Tips for 2019
CPA financial planners suggest that Americans should review their returns after every tax filing season to see if any the following opportunities make sense for them.
If your job has a 401(k) program or similar savings program and you're not participating in it, then you're missing out on one of the best opportunities to reduce your tax burden. All those contributions are free of current taxes. Your goal should be to contribute at least enough to get the full employer match if one is offered. Matching amounts are basically a “free” 100 percent return on your contribution. For the 2019 tax year, the contribution limit for employees who participate in workplace plans is $19,000. Participants over age 50 are eligible for additional “catch-up” contributions of up to $6,000.
If making 2019 contributions to accounts such as IRAs, 529s, and workplace retirement plans, do so as early in the year as possible. By making contributions earlier rather than later, you will benefit from more tax-free compounding growth, which can be substantial over time.
Tax time also is a good time to review your employee benefits to determine what changes to make in the next open enrollment period, which is usually in the fall. The Bureau of Labor Statistics finds that more than 30 percent of compensation is provided to workers in the form of benefits, so you may be surprised at all the options your company offers – some of which can help reduce taxes. Examples may include health savings accounts and commuter benefits, both of which employees can contribute to on a pretax basis, reducing taxable income.
Finally, the tax withholding rules for your employer have changed. To avoid either a large balance due or a cash flow surprise in the form of a much smaller than usual refund, review your tax withholding now. If it is not in line with expectations, work with your employer to adjust it before more of the year passes.
Need More Help – Talk to Your CPA
Don’t just speak to your CPA when it’s tax time! Many CPAs meet with clients throughout the year to ensure their financial plan is on track. And if you’re considering a major life event – such as getting married, having children, or buying a home – consult your CPA to understand the tax consequences. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.