We are now officially in the last quarter of 2018 and our focus should shift to tax planning. Let’s start with an overview of the 2017 Tax Cuts and Jobs Act, aka the new tax reform and how it affects us.
Major Tax Reform Changes for 2018:
- Standard deduction has doubled to $12,000 (Single) or $24,000 (Married)
- Miscellaneous itemized deductions subject to the 2 percent adjusted gross income limitation, like tax preparation fees and employee business expenses, were eliminated
- State and local tax deduction (SALT) is capped at $10,000 per year
- Mortgage interest deduction is deductible on loans up to $750,000 compared to $1,000,000 under the former tax law
What Does the Tax Reform Mean for You?
For those who typically claim the standard deduction, chances are that your tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit, may result in less tax. Also, you may find that those who itemized last year won’t itemize this year, or they may be able to itemize for state income tax purposes but not for federal. You will need to run the numbers to assess the impact on you. Depending on the results, you may need to adjust your estimated quarterly tax payments.
What Tax Planning Tips Can You Apply?
- Contribute to an IRA or 401K – This year you can contribute up to $5,500 to an IRA or up to $18,500 to a 401K plan. The sooner you contribute the money into an IRA/401K, the more time your investments will have to generate tax-deferred income and gains. Using this type of retirement can produce hundreds or even thousands of dollars in tax savings.
- Contribute to your HSA plan – HSAs are tied to high-deductible health insurance plans, and for 2018, those with individual health coverage can contribute $3,450, while family coverage participants can put $6,850 into an HSA. Those contributions are deductible on your taxes, and you don’t have to pay tax on investment income or gains if you use the money for qualifying healthcare expenses. That double benefit can give you even more savings.
- Adjust your tax withholding – The tax reform affected how much tax gets withheld from your paychecks. Make sure your withholding is as accurate as possible. This way, you can avoid having to wait for a big year-end refund and keep more of your hard-earned money upfront. For additional savings you can use this money to pay down debt and reduce your financing charges on a credit card or a loan.
- Take advantage of a flex plan at work – The benefit of these accounts is that the money you divert from your paycheck to the flex plan is pre-tax, and when you use the money for its intended purpose, you don’t have to pay taxes on it. Just keep in mind that you risk forfeiting flex plan money if you don’t use it by the end of the year.
- Sell losing investments early – If you own stocks or other investments that have lost money, selling them through a strategy called tax loss harvesting can get you a capital loss that you can use to offset capital gains on winning investments. This will also free up your capital to make new investments and potentially increase your rate of return.
- Own a business? Find the best structure -Tax reform had a big impact on businesses. The corporate tax rate got cut from 35% to 21%. Passthrough entities such as LLC or S-Corp also got a 20% Standard Deduction on Qualified Business Income (QBI). Consult with a tax planner for the right structure for you. This could save you thousands of dollars in unnecessary taxes.
- Look at diverting investment income to your children – If you’re in a high tax bracket and have children, you might be able to get a benefit by holding some investments in your children’s names. Kids can earn up to $1,050 tax free, and the next $1,050 gets taxed at the child’s lower rate. Moreover, new tax reform laws give kids a 10% rate on an additional $2,550 of income. The net result can be thousands in saved taxes compared to what you’d pay simply keeping investments in your own name.
- Pay your children – The tax reform eliminated the personal exemption deduction. So, if you own a business and have a child that turns 17 this year or is over 17, you can pay that child up to $12,000 per year. The income would be tax free to the child (assuming the child has no other income), yet a deduction for your business. The potential savings is in the thousands of dollars.
For more information on how you can increase your tax savings, lower your tax liability and build your wealth faster reach out to one of our tax advisors.