How to Maximize Your Tax Return
Editors Note: I’m happy to introduce Salil Mathur. Salil is one of my best friends, and has been my personal accountant for over a decade. He is a partner at Upstate CPAs and has over 15 years of experience with tax preparation and accounting.
Salil’s expertise is in tax planning and audit prevention; he has helped literally everyone on the planet save money on taxes except for you. In his free time, he teaches seminars on taxation, tax planning, and payroll processing throughout the Carolinas.
Salil’s company, Upstate CPAs is a Certified Public Accounting firm located in Spartanburg, South Carolina. They prepare taxes and perform Accounting, Consulting, and Audit services nationwide.
Salil is being super generous and offering YOU a 20% discount on tax preparation services. As long as you live (and pay taxes) in the US, Upstate CPAs can help you. I can tell you from personal experience, he’s saved me a ton of money.
Just send an email to Salil at smathur@upstatecpas.com and tell him you’re a tl;dr reader. He’ll take care of the rest.
Don’t be this guy just because you’re “supposed” to be an officially licensed, adulting pharmacy professional. It’s never too late! (Image)
As you may have guessed, this is not an article about pharmaceutical treatments or any of the many, many oozing, festering, and generally disgusting things that they help control or cure.
This article is about something we are much more squeamish about – money.
Or, more precisely, the most basic steps you need to take in order to take control of your money and save on taxes.
The standard disclaimers apply here: Your situation is unique, so please talk to a professional.
They’re almost always very nice. (And sometimes handsome.)
If you think you don’t need to talk to a professional, talk to one anyway.
Never underestimate the power of early detection – talking to a CPA early in your career could save you TENS OF THOUSANDS OF DOLLARS in taxes by the time you retire. And the right Financial Advisor could leverage relatively small amounts of money into gold plated yachts and diamond grill money given enough time.
Seeing as it’s February, which is, by most people’s calendars, before the tax filing deadline of April 15th, I’ll dole out some tax wisdom as you wrestle with your 2018 return.
How Pharmacists (and Other Healthcare Professionals) Can Save Money on Taxes
For your convenience, this will be in list form, from most important to equally as important:
1. Credits/Deductions for School
You’re in school (probably). You pay for it, too (also probably).
If you pay tuition, you’ll get a form 1098-T from your university. This form will tell you how much of that tuition is eligible for one of the following two federal tax credits to help offset your education expenses.
The first and most beneficial credit is the American Opportunity Credit.
To qualify, you must be in your first four years of college. (This will likely disqualify many readers here; don’t worry, the next credit is for you). The AOTC (that’s the professional abbreviation, try to keep up) allows you to claim 100% of your first $2,000 and 25% of your next $2,000 for tuition, books, and equipment (think laptops, tablets, calculators, etc., if they are required by the class or for enrollment at the university).
Based on that calculation, the maximum credit is $2,500. The first $1,500 will reduce your tax liability dollar for dollar until your tax liability becomes zero. Any remaining credit can be refunded to you up to $1,000.
How I feel when I realize something is non-refundable. (Image)
The second credit, for which most readers will be eligible, is the Lifetime Learning Credit and has a lower cap of $2,000.
It is calculated as 20% of your total expenses required to enroll in a class or university. Most of the time this is usually just tuition and books.
The upside is that you are not required to be actively working toward a degree. The downside (besides the lower cap) is that this is entirely non-refundable. That means that you can reduce your tax liability by $2,000, but none of the unused portion can be refunded directly to you.
Sad face. But hey, better than nothing!
There are a couple of caveats that apply to both credits.
Firstly, you must be attending an eligible university – this credit does not apply to your yoga class at the YMCA nor does it apply to classes taken at an unaccredited university in Guam.
Secondly, the taxpayer qualified to claim these credits is the one who is claiming the student’s dependency. So, if your parents are claiming you on their return, they are the ones who take the credit, not you.
If you claim yourself, get that money. I’ll give you a few ideas of what to do with it later in this article.
Lastly, remember that if you have a scholarship or pay for tuition from a tax-free education savings account (a 529 plan), you must reduce your expenses by these amounts before calculating the credit.
There’s one other school-related deduction (rather than a credit) that will apply to many readers here. You can claim any student loan interest you paid during the year.
If you’re interested in knowing, the fundamental difference between a credit and a deduction is that a credit is an amount of money that impacts the bottom line of your tax return dollar for dollar at the calculated amount, while a deduction reduces your income, which ends up reducing your bottom line by multiplying your marginal tax rate by the deducted amount.
You will receive a form 1098-E from your qualified loan holder that will tell you how much interest you paid for the year. There is a cap of $2,500 on the deduction and it’s subject to reduction based on your income.
If you make $65,000 ($130,000 joint income for married filers), the deduction begins to phase out until it hits zero if your income is $80,000 ($160,000 joint income for married filers).
2. Retirement Contributions
Nothing with Heath Shuler’s name on it will EVER appreciate, Brandon. (Image)
I mentioned earlier that I was going to tell you what you should do with your money.
While you may be tempted to spend it all on vintage Washington Redskins jerseys, a better idea would be to contribute to your retirement account.
If your company offers a retirement plan with matching contributions (401(k), 403(b), or Simple IRA, for example), take steps to maximize that matching contribution based on your company’s rules.
For the plans I mentioned, you get the additional benefit of reducing your current year’s taxable wages by the amount you contribute (this is called “deferred income”).
Waaaait…you gotta have how much to retire?!??!!!?
If you haven’t played with the numbers before, consider starting with this sample calculator so you can discuss options with your financial planner (the one you may not have yet but will want ASAP).
Contributions by your employer are considered deferred income as well. You can contribute up to $19,000 (not including your company’s contributions) in 2019, and this limit regularly increases.
To put this another way, using real numbers, if you made $100,000 last year, and you contributed $19,000 to your 401(k), you will only pay income taxes on $81,000 this year.
The $19,000 that you contributed to your retirement account will be taxed later (which I’ll talk about in a minute).
If your company doesn’t offer a retirement plan, you can take advantage of a Traditional IRA, which allows you to contribute up to $6,000 for 2018 (providing your earned income is at least $6,000).
The Traditional IRA functions the same way as a company-sponsored retirement plan outlined above. The taxes on your contributions and earnings are deferred, allowing you to reduce this year’s taxable income.
One of the reasons the Traditional IRA is a staple in the arsenal of tax savers is that you can still contribute for 2018 until April 15th, 2019. If you are looking for a very last second way to reduce your taxes, consider the Traditional IRA.
Unfortunately, the deduction of a Traditional IRA is reduced at certain income levels. If you make $63,000 ($101,000 joint income for married filers), your IRA deduction begins to phase out.
Yes, that means that most practicing pharmacists will not be able to contribute to a Traditional IRA. But in your student/residency years, it’s a great way to lower your tax burden.
So when ARE you taxed on a company-sponsored retirement plan or a Traditional IRA?
The word “deferred” in “deferred income” means exactly that. This income and all earnings will become taxable once you withdraw it in the future.
However, usually this comes after retirement, when your tax rate has decreased significantly – making this a terrific way to save on taxes. Also consider that withdrawing funds from a tax deferred account before you turn 59 ½ will likely subject you to a 10% penalty as well. Don’t withdraw these funds early without talking to your accountant first.
There is a way to contribute to your retirement without treating them as deferred income.
Using a Roth IRA (or 401(k)/403(b), if available) allows you to contribute using the same contribution limits while including them in your current year’s taxes.
The biggest benefit to this is that earnings in a Roth account are tax free. You’ll never have to pay taxes on the growth of your Roth IRA account. Depending on the earning potential of your Roth IRA account and your current and projected after retirement tax brackets, the Roth IRA is probably a more valuable retirement asset than a traditional IRA.
Just like the Traditional IRA, if you make too much money, there is a phase out where you cannot contribute to a Roth IRA. However, the income limits are higher, and there is a way around this commonly known as the “Backdoor Roth IRA.”
3. Health Insurance and Your Taxes
The Affordable Care Act (2010), requiring all Americans to have a minimum level of health insurance, was eradicated by the Tax Cut and Jobs Act (2017).
So, it would stand to reason that you wouldn’t be penalized for not having health insurance in 2018, which was inarguably after 2017.
However, Congress doesn’t agree; the penalties will not go away until tax year 2019. For 2018, penalties still apply (generally maxing at $695 for each uninsured adult and $347.50 for each uninsured child, with $2,085 generally being the max for a family). There are numerous exceptions to these rules, though.
Depending on your situation, if you were unable to afford or secure health insurance, you may be exempt from the penalty. The exceptions themselves are too many to list here, so if you find yourself in a situation where you may owe this penalty, I’d suggest you contact a professional tax preparer to help you sort through them.
An option that may be useful to you, regardless of ACA (that’s the professional abbreviation, try to keep up) rules, is a Health Savings Account.
The only requirement is that you have a high deductible health plan, which is generally the most affordable coverage available. The IRS considers a plan with a deductible of $1,350 for an individual ($2,700 for a family plan) or more to qualify. If you meet this requirement, you can contribute up to $3,500 ($7,000 for a family) and claim a deduction.
Like the IRA, you can still contribute this amount until April 15th, 2019, and designate the amount for 2018. Like the Roth IRA, all earnings are tax free, if you use the funds for qualified medical expenses.
Used correctly, the HSA (that’s the professional abbreviation, try to keep up) is one of the very few instances where you can fully protect your money and its earnings from ever being taxed.
Even though this dancing seems like it would qualify for medical coverage, alas…it doesn’t. (Image)
Qualified medical expenses include co-pays, prescriptions, specialist consultations, dental visits, eye exams, etc. Notably, they do not include over the counter medications, cosmetic surgeries, and, for some specific reason, dancing lessons.
Apparently, the IRS doesn’t consider your lack of rhythm a medical condition.
4. Tax Changes
Much has been made of the new tax laws that came into effect in 2018. As it turns out, they are … not quite as radical as we were made to believe.
Most Americans can expect more of the same. That said, there are certainly some changes with which you should be familiar. For example (prepare for a sub-list):
a. Child Tax Credit/Other Dependent Credit
For those of you with dependents on your return, the method in which they affect your tax return has changed drastically. The Child Tax Credit has been simplified somewhat.
Whereas in years prior a taxpayer would use the CTC (that’s the professional abbreviation, try to keep up) in concert with the aptly named Additional Tax Credit to receive a benefit of up to $2000, the new rules combine both old credits into the CTC with the same potential maximum benefit.
However, the new rules allow for up to $1,400 of that credit to be refundable per child, as opposed to the previous limit of $1,000 per child.
This means that most American families will receive more money from the Child Tax Credit this year.
If your dependent is over 16, the Child Tax Credit does not apply (it never has).
This year, you’ll be eligible for the Other Dependent Tax Credit, which will provide a $500 (non-refundable) credit for each eligible dependent over 16.
b. Increased Standard Deductions versus Itemized Deductions
One of the most shocking changes is the elimination of exemptions for you and the members of your household. In the past, the IRS allowed you to reduce your taxable income by up to $4,050 per individual on your return.
This no longer exists, instead opting for a much higher standard deduction ($12,000 for single filers, $24,000 for married filers, $18,000 for Head of Household filers - single filers with eligible dependents).
This provides a better tax break for people who don’t itemize (usually people who don’t have mortgages, pay high property taxes, and don’t have enough money to donate vast sums to charity).
There is some debate as to whether this new system will result in a better or worse tax situation overall for most Americans, but in general, we can expect a sharp rise in the number of people who take the standard deduction (which was already most of the population).
More people should have simpler tax returns to file, which will hopefully drive down the cost to use a professional.
If you are still itemizing under the new rules, remember that certain limits still apply. Deductions for itemized medical expenses only kick in after you’ve spent 7.5% of your gross income in medical costs.
For example, if you make $100,000 and spend $8,000 for out of pocket medical expenses (including out of pocket health insurance, long term disability insurance, and mileage), only $500 are deductible medical expenses.
These expenses, along with charitable contributions, mortgage interest, and property/state taxes would need to total more than your standard deduction for you to see a benefit to itemize.
Plenty of you will reach this threshold based solely on your mortgage interest, taxes, and charitable contributions. If so, make sure to fill out a Schedule A with your return to maximize your refund (or minimize your taxes owed).
So, there are a few things that should help you best prepare your tax return. Remember, these things are fluid; each year may bring new strategies and tactics to help you save.
Whether you have an accountant, tax preparer, or file your own taxes, nothing is as effective as doing vast amounts of research on your own. I encourage you to dig deeper into these riveting tax topics (and others) and go to a professional with questions.
This is Salil. Saving me money on taxes.
As I stated before, your situation is unique, and no article for mass consumption (even one as elegant and informative as this one) can truly distill all the information you need to get the most out of your return.
Just rest easy knowing that whatever the case, no matter how much you pay, your tax money will ultimately be wasted just like the rest of ours.
Good luck!
Remember, Salil and the kind folks at Upstate CPAs can help you maximize your tax return. And they’re giving you a 20% discount just for being a tl;dr reader.
Just email smathur@upstatecpas.com to claim your discount.
BTW, tl;dr pharmacy is not an affiliate with Upstate CPAs. We don’t get a commission if you use their tax prep and accounting services. I just think they are super great, and they are offering you a 20% discount out of the kindness of their own hearts.