Losing sleep over your taxes?Submitted by Korhorn Financial Group, Inc. on January 10th, 2019
By Ryan Fair
Tax season is officially here, which means taxpayers across the country are frantically trying to figure out exactly how the recent tax reform will impact their 2018 returns. It’s no surprise. While the Tax Cuts and Jobs Act (TCJA) was designed to simplify the tax code and streamline the process of filing, so far it has done the opposite, delivering confusion (at best) and, in some cases, downright uncertainty. Luckily, just in time for CPAs and accountants to help our clients tackle the job ahead, the IRS has finally provided some much-needed clarity.
The good news is that most people will see a reduction in taxes. In the tax projections we’ve completed to date, more than 90% of our clients will have a smaller tax bill for 2018 compared to 2017. The standard deduction has nearly doubled, up from $12,700 for married couples filing jointly to $24,000, and to $12,000 for single filers, up from $6,350. That’s great for taxpayers who typically have less than the standard amount to deduct (and yes, for these folks, there is no longer a need to itemize), but for taxpayers whose deductions are hovering right around that magic number, strategic tax planning can make a difference in what you owe. Take these steps today help keep your tax bill as low as possible—in 2018 and beyond:
Don’t wait to tackle the paperwork.
With all the uncertainty, your instinct may be to bury your head in the sand and put off the inevitable as long as possible. Don’t do it! Knowing the facts early will give you time to plan for any taxes due, get on track for 2019, and even apply late-season strategies to lower your tax bill this year. As soon as you receive your W-2s, pull your documents together and schedule time with your accountant.
Explore ways to reduce your bill.
New Years Eve has come and gone, but you still have time to make contributions to your IRA, Roth IRA, and HSA for the 2018 tax year to reduce your taxable income.
- Maximize your Roth and IRA contributions. You have until April 15 to contribute the full amount to these retirement accounts to reduce your taxable income. The limit for both types of accounts is $5,500, plus an extra $1,000 in catch-up contributions if you’re over 50. And if you don’t have a qualified account, as long as you set one up before the April 15 deadline, you can contribute for the 2018 tax year. (We’re happy to help!)
- Fully fund your Health Savings Account (HSA). Using an HSA, you can contribute to your account with pre-tax dollars, grow your assets tax-free, and make tax-free withdrawals (as long as they are used for qualified medical expenses). This triple tax benefit makes the HSA one of the most powerful tax-savings vehicles around. If you already have access to an HSA, be sure you’ve contributed the full $6,900 for the year, plus the additional $1,000 “catch-up” contribution if you are 55 or older. This amount is deducted directly from your taxable income.
Plan ahead for 2019.
Now that everyone (the IRS included!) understands the new tax law a bit better, you can plan more effectively to reduce next year’s tax bill. Here are a few things to consider, but talk to your financial advisor to explore which strategies are most suitable for you:
- Update your withholdings. In prior years, many married couple claimed two exemptions, regardless of whether or not they had two children to claim. That strategy may have worked well in the past, but in 2018, the increase in allowable child tax credits caused the amount withheld from each paycheck to drop. As a result, lots of people are realizing they withheld less than expected. That’s just one example of why it’s so important to review and update your withholdings. If, after completing your 2018 taxes, you find that your withholdings were too low in 2018, change your withholdings now to avoid underpayment in 2019.
- Adjust your retirement account contributions. In 2019, you can sock away up to $19,000 in your 401(k)—up from $18,500 in 2018. The limit for IRAs and Roth IRAs has increased to $6,000—up from $5,500 this year. And if you are 50 or older, be sure to include the $6,000 401(k) and $1,000 IRA catch-up contributions.
- Bunch your charitable contributions. While you can’t go back in time to use this strategy to reduce your 2018 bill, it can be particularly useful if you are a regular charitable donor. While few of us gift more than the standard deduction each year (which eliminates any tax benefit), “bunching” two years of gifts into a single tax year may be enough to push you above the standard deduction. For example, if you plan to give $8,000 each year for the next few years, consider gifting a lump sum of $16,000 in 2019 and then taking a break in 2020. When added to your other itemized deductions, that amount may be enough to push you beyond the standard deduction and receive a tax benefit for your charitable contribution. (Note that you can only deduct cash donations of up to 60% of your Adjusted Gross Income, or AGI, in a single year.)
- Consider a Donor Advised Fund (DAF) or Qualified Charitable Distribution (QCD). If your contributions to a particular charity are substantial, a Donor Advised Fund allows you to make a lump-sum donation to take advantage of the up-front charitable tax deduction in the current year. Because the DAF gives you the flexibility to spread your gift out over time, there is no need to bunch your contributions. For those over 70½, a Qualified Charitable Distribution is another option that allows you to use pre-tax money in your IRA to make your charitable contributions, potentially doubling your tax savings. You can use a QCD to give up to $100,000 annually—even if that amount exceeds your Required Minimum Distribution (RMD). It’s a great way to optimize tax savings compared to using a typical after-tax IRA distribution. This results in you being allowed to reduce your taxable income by the amount of your charitable contribution—even if you don’t itemize deductions! Ask us for details.
- Save your receipts. If your deductions in 2018 were even close to $24,000, continue to track your deductible expenses and save your receipts in the coming year. These include qualified medical expenses, childcare expenses, and self-employment expenses. (Note that unreimbursed work-related expenses are no longer deductible under the new law.) You may not need them after all, but it’s always best to stay on the safe side.
Whew! Now go get some sleep!