TIP CONTENT PROVIDED BY: KELLEY LONG AT FINANCIAL FINESSE
The new tax law enacted earlier this year could mean big changes for your personal tax situation. Before we wind down 2018, it’s wise to take a moment and check you’re making all the best moves. Here are 7 things to check:
1. Double Check Your Deductions
In previous years, taxpayers were encouraged to accelerate any deductions to the current year to make the most of them, but that wisdom may not make sense with the new tax law. For example, for people who pay estimated taxes, it’s common to pay the 4th quarter state estimate on December 31st so you can deduct that payment in the current year. Now that the total deduction for state and local taxes is limited to $10,000, that might not be the best move anymore.
First of all, the standard deduction was increased to $12,000 for single filers and $24,000 for married, which means you may not even be itemizing deductions anymore — only if your mortgage interest (on the first $750,000 of a mortgage) plus taxes (limited to $10,000) and charitable contributions (limited as well, depending on what you’re giving) exceeds $24,000. In other words, if your property taxes and state/local income taxes are $10,000 or more, you also have to have $14,000 of mortgage interest and charitable contributions to even need to itemize.
What does that mean to you? Before you make tax-saving moves like you have in years past, such as giving to charity just for the deduction or accelerating paying taxes, make sure you’ll even be deducting those things for 2018.
2. Make Up a Tax Shortfall With Increased Withholding
If you’ve had a change in marital status, a change in the number of dependents in your household, or a substantial change in income, you may have had too much or too little income tax withheld this year. Run an estimate of your tax liability and compare it to how much tax you have paid either directly to the IRS or through withholdings on your paycheck. If it doesn’t look like enough, make extra payments now while there’s still time – you can adjust your W-4 if there’s enough time, or just make an estimated payment using the proper forms. It may not save you from an underpayment penalty for prior quarters, but it should help for the last quarter.
3. Leverage Retirement Account Savings
If you have a 401(k) at work, you are eligible to contribute up to $18,500 for the year (plus an extra $6,000 if you turned age 50 or older this year). If you have not reached this limit yet and anticipate higher taxes this year, consider increasing your pre-tax contributions before year-end to get closer. You can also contribute to a traditional IRA (which is deductible if your income is low enough), but you have up until April 15, 2019 to make that contribution so you don’t have to be in as much of a hurry.
4. Look Into Roth Conversion Options
While most of these suggestions are ways to help reduce your 2018 taxable income, due to lower rates you may actually wish to convert pre-tax retirement savings to Roth either using an IRA or in your 401(k). Any funds you roll from a traditional IRA to a Roth IRA or convert in your 401(k) are treated as taxable income for the year, but depending on where you are in your tax bracket, you may find it worthwhile to lock in a possibly lower tax rate if you have many years to go until retirement or just simply think that tax rates will be higher when you do retire.
What to watch out for
- Know where you are in your tax bracket and make sure any conversions don’t push you into a higher bracket.
- This can be an especially smart move if you do this when the market is down.
- Be aware the new tax law took away the ability to change your mind on this, so once you flip the switch to Roth, it’s done.
- Make sure you can pay any resulting taxes with funds outside your IRA or 401(k).
5. Maximize “Above-the-Line” Deductions
While these are technically just adjustments to income, above-the-line deductions are a great way to reduce your taxable income without the requirement to itemize. Some of the more common deductions include traditional IRA and health savings account (HSA) contributions, self-employed health insurance costs, and alimony payments (although that particular deduction ends this year). Keep in mind that you can make HSA contributions via lump sum up until the tax filing deadline in April.
6. Look Into Tax-Loss Harvesting With Any Brokerage Investments
If you own any stocks or mutual funds in a taxable brokerage account, this strategy is for you. Investments held more than one year are taxed at more favorable long-term capital gains tax rates, while investments sold that have been held for one year or less after purchase are subject to the higher ordinary income tax rates.
If you have capital gains to report for the year, consider selling other securities that may generate a loss in order to offset some or all of the gain. In addition, up to $3,000 of capital losses not offset by capital gains can be taken off ordinary income taxes annually. The remaining losses can be carried forward indefinitely. Just take care that you are only selling securities you truly no longer wish to hold anymore – if you buy the same thing back within 30 days, the IRS will disallow the loss due to the wash sale rule.
7. Don’t Squander Your Gift Tax Exclusion
Any taxpayer may give cash and noncash gifts totaling up to $15,000 in value to as many people as they wish without incurring a gift tax in 2018. (Couples can combine their gift and give up to $30,000 per recipient.) If you have a sizeable estate and are feeling extra jolly this year, be sure to take advantage of this annual tax break.
As we often say at Financial Finesse, financial planning is a process, not an event. The same is true of tax planning. Begin the process today so that you can have a happy and prosperous tomorrow.