Tax laws have traditionally been complicated for taxpayers to understand. The recently passed Tax Cuts and Jobs Act (TCJA) has added another layer of confusion — at least for the immediate future. As tax time approaches, many taxpayers are wondering how it will affect their tax bill when they file for 2018.
New law or not, it's always a good idea to be proactive when it comes to tax planning. Taxpayers looking for ways to save money on their 2018 tax bill or beyond should consider taking the following actions.
1. Adjust paycheck withholdings
This is a biggie because the TCJA made many changes that impact tax liabilities directly. Some major changes include the elimination of the personal exemption, a higher child tax credit and increased standard deductions. Taxpayers should consider adjusting their W-4 to optimize their tax withholdings. The paycheck adjustment this late in the year probably won’t do much to benefit taxes in the tax year 2018, but it is something that should be reviewed and potentially adjusted to improve a full calendar year 2019.
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According to the U.S. Government Accountability Office, 21% of taxpayers already aren't withholding enough out of their paychecks. Since the passing of the TCJA, this could drastically have an impact come tax time, with some sticker shock when the taxman arrives.
The IRS recommends all taxpayers do a "paycheck checkup" to see if they should make any adjustments. The agency offers a withholdings calculator on its website to assist taxpayers in running the numbers so they can see if they would benefit from making some changes to their W-4.
2. Consolidate deductions where possible
Consolidating deductions is another good strategy for those looking to shift deductible expenses to the current year. For example, making extra mortgage payments prior to the end of the year would entitle the taxpayer to claim interest for that tax year. Another way deductions can shift is by prepaying any normally prepaid deduction expenses for 2019 in December 2018, such as memberships to nonprofit organizations. If your total itemized deductions, after applying the new limitations on state tax deductions, are less than the now increased standard deduction, this strategy will not likely benefit you. That being said, bunching itemized deductions may push a standard deduction tax filer into itemizing.
3. Contribute more to retirement funds
Increasing contributions to retirement funds is a perennial way to reduce a tax bill, and this isn’t changing under the new tax law. Financial planners generally recommend that clients contribute at least 10% of their salaries to their 401(k).
Keep in mind that this amount should not include any employer contributions, since that won't help reduce the 2018 tax bill. Taxpayers can contribute (and deduct) up to $18,500 per year in 2018 and, and if over age 50, up to $24,500.
To further reduce tax liability, taxpayers should consider contributing the maximum amount of $5,500 ($6,500 if over age 50) to their existing IRAs prior to April 15, 2019, or, if they don't have one, open a new one by that date. Just note that the deductible amount may vary depending upon income level, as well as coverage under other retirement plans.
4. Pay off non-qualifying home equity loans
OK, this isn’t exactly a strategy to save on your 2018 tax bill, but it could be a money-saving strategy in general. Previously, home equity loans were a tax-reduction strategy because their interest was deductible. Although, this is no longer the case since new stipulations limit eligibility. The only exclusion where deductions are still allowed, is if the loan was taken out to buy, build or improve the home.
Taxpayers with an outstanding home equity loan should consider paying it off, because interest payments can be costly — for example, an individual with a home equity loan of $100,000 with an interest rate of 5.25% amortized over 15 years will pay roughly $44,700 in interest — and there may no longer be any tax benefits available to offset it. It’s important to first evaluate the interest rate you are paying on the home equity loan versus what you could earn if you invested.
5. Take a closer look at medical expenses
Since the TCJA reduced the threshold for medical expense deductions from 10% of adjusted gross income to 7.5%, some taxpayers may now be eligible to claim their copays, cost-shares, prescriptions, dental costs and other medical expenses.
Previously, many taxpayers didn't bother keeping receipts since it was hard to reach the threshold. Now it'll be worth the effort to at least take a look. While considering medical expenses, looking into a health savings account is also something to think about.Commonly referred to as HSAs, these accounts are tax-free at the time of deposit, withdrawal for eligible expenses are tax-free and, since the balance grows tax-deferred, this might make sense for taxpayers enrolled in qualifying high-deductible health insurance plans.
6. Examine current investments
Investments and tax law can be tricky, and nothing has changed here. Taxpayers who hold investments will want to consider their long-term and short-term capital gains. Since the IRS taxes the two at different rates, holding onto a profitable venture a little longer to meet the one-year, one-day requirement to qualify as a long-term capital gain will result in bigger tax savings. Accordingly, be sure to sell losing stocks earlier than later. Sellling stocks sooner than later would qualify for a tax deduction now rather than in an unknown future. It also could qualify you for the $3,000 capital loss deduction over and above total capital gains.
To scale back on their tax bills, taxpayers can donate winning investments to charity or by putting some investments in their children's names (kids get up to $1,050 tax-free and pay a lower tax rate on anything higher).
It's important for all taxpayers to keep in mind that many previously eligible deductions will no longer apply going forward. Before filing a 2018 tax return, it's a good idea to take a look at the tax deductions that are going away because it'll definitely have an impact on the upcoming tax bill.
However, by being proactive, getting familiarized with the changes and understanding ways to save, taxpayers have an opportunity to see where they can reduce their tax liability or boost their refund.
Contributing: James C. Ellis, CPA.
Synergy Financial Group is a comprehensive financial services firm committed to helping our clients improve their long-term financial success. Our customized programs are designed to help grow and conserve our clients’ wealth by delivering an unprecedented level of personalized service. Learn more at synergyfinancialgrp.com.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered though SFG Wealth Management, a registered investment advisor. SFG Wealth Management and Synergy Financial Group are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser.
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