With the 2018 tax season over, you may have noticed a lesser amount being withheld from your paycheck. You may have also noticed a revamped Form 1040. These changes were a result of the Tax Cuts and Jobs Act that became law in Dec. 2017.
What does this mean? New laws, new processes. New processes means new preparation.
It is never too early to plan for taxes. If you are someone who likes to be ahead of the curve or simply want to be more proactive for this year’s taxes, here are our top three tips to consider for 2019:
Tip #1: Account for the increased standard deduction and behave accordingly.
Each year you have the option of claiming the standard deduction or itemizing your deductions. Both paths lower the amount of taxes you pay by reducing your income that is subject to taxation.
Standard Deduction: The standard deduction is a flat-dollar amount that is quick/easy to claim. Tax filers who have few or no itemized deductions to claim will opt for the standard deduction.
Itemized Deduction: If you itemize, it means you have deductible expenses that collectively exceed the standard deduction. Some examples of such itemizations include:
Medical expenses that exceed 10% of your adjusted gross income (AGI)
Charitable contributions, generally no more than 60% of your AGI
Sales and property tax, up to $10,000
Bottom Line: Historically, itemizing was an opportunity to accumulate more in deductions because the standard deduction was much lower prior to the new tax code. With the bump in the standard deduction, many tax-filers who previously itemized now may not. Here is how the standard deduction increased, just looking at 2017 to 2018:
If you historically itemized, there is no tax benefit of paying those expenses moving forward if your itemized total falls short of the standard deduction. With that said, be cautious throughout the year on what you are spending. If your sole purpose for paying something now is to reap future tax benefits by itemizing your deductions, you may want to re-consider that approach. For instance, this may influence you to pay down your mortgage quicker if you no longer itemize the mortgage interest. Note that the 2019 standard deduction increases for inflation:
Tip #2: Adjust your withholding, if necessary.
Tax reform threw quite a wrench into how much is actually withheld for taxes. With changes to various credits and deductions, this caused a smaller portion of each paycheck to be withheld for taxes. As a result, people ended up receiving a smaller refund or potentially having to owe more once they filed.
What does this mean? It depends. What you pay now in taxes vs. what you might owe later is like a seesaw — as one side falls, the other rises. If you have fewer taxes withheld now, you may end up paying more later. The overall goal is to not owe any additional taxes or receive a refund. This means the precise amount of income tax was withheld throughout the year.
How do you calculate a more accurate withholding?
Use your 2018 tax return to help guide you. If you are expecting no major financial changes, use the same information, such as income and deductions, and apply those figures to the current (2019) tax rates. This will help determine what your projected tax liability might be. From there, adjust your withholding accordingly. To help you with this process, see below for the breakdown of the 2019 tax brackets:
If you decide to change your withholding, this can be easily implemented through your W-4 at your employer. Your W-4 highlights how much federal income tax you would like to have withheld from each paycheck, which is demonstrated through claiming a certain amount of “allowances” . The fewer allowances you claim, the more taxes are withheld. Conversely, the more allowances you claim the less taxes will be taken out. You can claim between zero and 9 allowances.
For example, if you currently claim “2” and would like more taxes to be withheld throughout the year, you could reduce your claim from “2” to “1”. You are not allowed to make changes to a pre-existing W-4 (likely completed when you first started your job), so you would have to submit a new W-4. This should only take a few minutes to complete.
Bottom Line: To prevent surprises down the road when you file taxes for 2019, your 2018 tax return provides insight into how the new tax laws impacted you. Use your 2018 tax return as your foundation to implement future changes.
Tip #3: Maximize the increased retirement plan contribution limits.
For several years the amount you could contribute into certain retirement plans was static. Under the new tax laws, those contribution limits have increased in 2019:
Retirement account owners can take advantage by contributing more tax-deferred dollars, which provides a greater opportunity for those funds to grow. Greater opportunity means better odds of reaching your retirement goals.
The more you contribute, the lower your taxable income will be because your contributions into a tax-deferred account (401k, IRA, SIMPLE) are shielded from taxes.
Bottom Line: By making use of the increased contribution limits, you both bolster your savings capability and defer more of your current income from taxation.
For more specific advice on how you can plan ahead, please feel free to contact me directly.
Investment Adviser Representative