Surprised By Taxes? Try These Tips

Yes, I know, you just filed your taxes and the last thing you want to think about is taxes. I get it. But, what if there were some simple ways of reducing your tax liability and decreasing your chances of owing next April? Interested? Take 90 seconds to skim the following tips:

Paycheck checkup:

This is the ‘turn your head and cough’ portion of the blog post but, hang with me here, the rest is easier. Last year the IRS provided guidance to employers about how much to withhold on employees’ paychecks, so most of us received more take-home pay starting in about February. For some of us, however, that meant we had to pay at filing time rather than receive a refund – even if we usually receive a refund. Avoid the surprise this year:

Gather your 2018 tax return and the most current pay stubs for you and your spouse, if applicable. You’ll need that info to fill out the IRS Withholding Calculator - https://apps.irs.gov/app/withholdingcalculator/. The calculator is easy to use and will help you estimate whether you’ll owe at the end of 2019 or be owed. Doing this sooner than later will help you adjust your withholdings to either receive less in each paycheck and not owe at the end; or receive more in each paycheck and not receive as large a refund. Either way, this is the smart way to plan and avoid another surprise next year.

Contribute to your workplace retirement plan pre-tax:

This is the preachy portion of the post. I’m sometimes asked why we recommend our clients contribute to their 401(k)s and 403(b)s pre-tax. Two reasons:

1. Every dollar you contribute to your work retirement plan pre-tax will reduce your taxable income by that same dollar;
2. Since that contribution will reduce your taxable income, you can actually afford to contribute more without reducing your take-home pay. For instance, let’s say you are currently contributing $1,000 after-tax to your 401(k)/403(b). You actually have to earn $1,428 first – you pay roughly 30% of that in tax and contribute the rest. But, if you contribute pre-tax, it only takes $1,000 in earnings to contribute $1,000. Or, you could contribute the full $1,428 pre-tax – take-home pay is the same as before - but your future self will get the benefit of an additional $428 plus the earnings on that amount over all the years until retirement. That’s a much better deal!

Extra benefit for UK faculty and staff:

UK offers a 457(b) in addition to the standard 403(b). So, you can max out your contributions to the 403(b) and double your savings by also contributing to a 457(b). There isn’t a UK match on the contributions to the 457(b) but you can save pre-tax plus, if you ever leave UK prior to retirement, you can withdraw those funds prior to age 59 1/2 without penalty. That’s not possible with a 403(b) or 401(k). You can essentially save up to 2 years for every 1 year you work at UK. I did that for most of my time at UK and it super-charged my retirement savings.

How much can you contribute in 2019?

• 401(K) or 403(b) or 457(b)

$19,000 is the IRS limit – those turning 50 this year can contribute an additional $6,000 for a total of $25,000

• Individual Retirement Accounts (IRA)

$6,000 – those turning 50 this year can contribute an additional $1,000. Making a tax-deductible contribution can be limited by income.

• So, if you have a workplace retirement plan like a 401(k)/403(b): if single and have an Adjusted Gross Income (AGI) over $64,000, check with an advisor before contributing. If married and your AGI is $103,000, same thing.
• If you don’t have a workplace retirement plan then there is no income threshold that limits your ability to make a tax-deductible contribution to your IRA.Roth Individual Retirement Accounts (Roth IRA)

• Roth Individual Retirement Accounts (Roth IRA)

$6,000 - those turning 50 this year can contribute an additional $1,000. Roth contributions are made after-tax but, when withdrawn, are tax-free – including the earnings. Again, there are income limits: If single and your AGI is $122,000, check with an advisor before contributing. If married and filing jointly, the AGI limit is $193,000.

• Health Savings Accounts (HSA)

For those who have high-deductible health insurance plans, an HSA is not only a good way to save tax on healthcare costs, but can also be a retirement savings vehicle. UK now offers an HSA, by the way.

To be considered a high-deductible plan, your health insurance must have deductibles of at least $1,350 for singles and $2,700 for a family. If so, a single may contribute up to $3,500 in 2019 pre-tax, families $7,000.

Contributions to an HSA not only carry over year to year – unlike a Flexible Savings Account – but can be used for income in retirement and can be withdrawn tax-free. The rules are too complicated to explain here but, for those that qualify, HSAs can be valuable savings tools that provide tremendous tax savings.

I talk a lot about investing in this blog and, while extremely important, even superb investment returns can’t overcome insufficient savings habits. Saving will not only help reduce your tax burden but, more important, benefit your future self.

Steve Byars, CFP®