Don’t count on tax refunds to pay holiday bills
Careful planning will help stretch your money through the season
Stop, take a deep breath and wait for a warning from the Internal Revenue Service before you pull out that plastic to jump on yet another holiday deal on a TV, toys or a smartphone.
Will you really have all the money you need by January or February to cover all those holiday bills? Not necessarily, if you’re banking on a big income tax refund in early 2020.
The IRS put taxpayers on notice in late November that they shouldn’t “rely on receiving their refund by a certain date, especially when making major purchases or paying bills.”
It’s likely that the earliest you could be able to file your 2019 income tax return would be in late January.
The kickoff date was Jan. 28, 2019, for the 2018 federal income tax returns.
Typically, it can take up to 21 days to receive a federal income tax refund.
But people who already are on tight budgets may need to wait longer if they’re claiming the earned income tax credit or the additional child tax credit.
By law, refunds for returns claiming earned income or additional child tax credits cannot be issued until after mid February. The delay applies to the entire refund, not just the money you’d receive via the credits.
Another important reminder: Your tax refund could be much smaller than you might expect, too.
Here are some year-end tax tips:
Donating to charities requires more tax planning
The tax rule changes that went into place in 2018 nearly doubled the standard deduction to $12,200 for single filers in 2019 and $24,400 for married couples filing a joint return. The standard deduction goes up for those age 65 and older, as well as those who are blind.
For example, if you’re married and each spouse is 65 or older, the standard deduction goes up by an extra $2,600 for the senior couple filing jointly.
“Because tax reform nearly doubled the standard deduction, fewer people will benefit from itemizing,” said Nathan Rigney, lead tax research analyst for the H&R Block Tax Institute.
Yet if you’re near the standard limit, you might need to consider if you want to make some sizable charitable contributions by the end of December to claim on your 2019 tax return or if it would be better to wait until January to claim those deductions in 2020.
“Bunching your itemized deductions by accelerating or delaying payments
could help you get over the standard deduction every other year,” Rigney said.
No one is saying you can’t write a check to a charity for $50 or $100 here and there. But the latest shift in the tax rules makes it essential to pay attention to the dollar amount of your other potential deductions, such as mortgage interest and state and local income taxes, as well as property taxes.
Remember use-it-or-lose-it money, like FSAs
If you set aside money out of your paycheck into a health flexible spending account in 2019, make sure that the taxfree money is spent on qualified medical expenses before any designated deadline, Rigney said.
Unspent money is just money left on the table.
You may need to spend that money before Dec. 31 – or by a set grace period, if your company’s plan provides one.
Money can be used on qualified medical expenses not covered by your health plan such as eyeglasses, co-pays and medical equipment.
The IRS notes that under a special rule, employers may, if they choose, offer participating employees more time through either the carryover option or the grace period option.
Seniors, double check 401(k) withdrawals
Retirees who are 70-and-a-half or older need to see if they’ve taken out enough money over the year to cover any required minimum distributions from their 401(k) plans or traditional IRAs.
If you don’t need the money – but must take it out by Dec. 31 to avoid costly penalties – you can consider having it sent directly to a charity as a qualified charitable distribution, according to George W. Smith, a certified public accountant in Southfield, Michigan.
The qualified charitable distribution would need to be completed by year end, Smith said, and it would work only if you had not taken your required minimum distribution for 2019.
Understand tax implications of bonuses
The IRS notes that year-end bonuses, holiday pay and temporary jobs can often have an unexpected impact on taxes and any potential refund when you file the 2019 tax return next year.
Your tax bill also could go up by other factors, such as capital gain distributions from mutual funds and stocks, or investments sold at a profit.
The UAW contracts reached with General Motors, Ford and Fiat Chrysler Automobiles all had some generous bonuses. Ford, for example, paid out its ratification bonuses on Nov. 29. Fulltime hourly Ford employees received $9,000 and temporary employees received $3,500 before taxes.
While taxes are taken out of the ratification bonuses, it’s important to factor in other sources of income that could drive up your 2019 tax bill, too.
The IRS notes that taxpayers can still make a quarterly estimated tax payment directly to the IRS for the fourth quarter of 2019. Such a payment would be due by Jan. 15, 2020.
Update your payroll withholding
Mark Steber, chief tax officer at Jackson Hewitt, said taxpayers want to consider if they are withholding enough in taxes for 2020, too. You can provide your employer with an updated W-4 form to make those adjustments.
Tax filers who don’t take action risk getting a smaller refund than expected or perhaps owing more money than they would imagine, Steber said.
The Tax Withholding Estimator at irs.gov can help taxpayers see if they’re having enough tax withheld.