With the end of the year fast approaching, you may already be contemplating how to prep for tax time and get the most out of the changes introduced with the 2017 Tax Cuts and Jobs Act. With adjusted credits, exemptions and tax brackets, now is an ideal time to look at your finances and take crucial steps to maximize savings before the end of the fourth quarter. With that in mind, consider these savvy money moves before Dec. 31 to stay prepared ahead of the tax-filing season.
Adjust your withholdings. If you haven’t taken this important step yet, you should, says Joseph Conroy, a certified financial planner and financial advisor at Synergy Financial Group in Towson, Maryland. “The TCJA made sweeping changes that directly impact tax liabilities,” Conroy says. “These changes include the elimination of the personal exemption, a higher amount of the child tax credit and increased standard deductions. Taxpayers may want to adjust their W-4 to optimize their tax withholdings,” he says. He also adds that the Internal Revenue Service’s website features a withholding calculator that can help taxpayers see if they would benefit from making changes to their W-4. Plus, the withholding calculator can save you time since you won’t have to complete the Form W-4 worksheets that you would otherwise have to fill out.
Group your deductions wherever possible. Many itemized deductions have been limited or ended by the new tax law, so your credits and tax breaks may vary. “Beginning in 2018, many taxpayers who claimed itemized deductions year after year may no longer be able to do so. That’s because the basic standard deduction has been increased — to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household and $12,000 for marrieds filing separately — and many itemized deductions have been cut back or abolished,” says Steven Weil, president and tax manager of RMS Accounting in Fort Lauderdale, Florida.
But Weil adds that there are some things you can still deduct, including state and local taxes (but no more than $10,000), some personal casualty losses and charitable contributions. But you won’t save taxes if these deductions don’t cumulatively exceed the new, higher standard deduction, Weil says.
“Some taxpayers may be able to work around the new reality by applying a ‘bunching strategy’ to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good,” he says. “For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.”
You may try it with something similar with your mortgages, Conroy says. “For instance, making one or more extra mortgage payments prior to year’s close would entitle the taxpayer to claim the interest paid on these mortgage payments for the current tax year,” he says.
If you’re unsure if this is the best strategy for you or if you have a complicated financial situation, it’s a smart idea to consult a tax preparer, rather than taking a DIY approach to tax filing.
Pay off nonqualifying home equity loans. “In the past, having a home equity loan was a tax-reduction strategy since the interest was deductible. However, this is no longer the case because new stipulations make eligibility very limited,” Conroy says. “The only exclusion where a deduction is still allowed is if the loan was taken out to buy, build or improve the home itself.”
So if you have an outstanding home equity loan, Conroy suggests paying it off “since interest payments are costly, and there may be no longer a tax benefit available to offset it. Of course, evaluate the interest rate you are paying on the home equity loan versus what you could earn if you invested the money instead.”
Contribute more to your 401(k). “Contributing the max to your 401(k) reduces your tax bill,” says Robert Johnson, a certified financial analyst and a professor of finance at Creighton University in Omaha, Nebraska.
Individuals younger than 50 can contribute a maximum of $18,500 to a 401(k), while those ages 50 and older can contribute up to $24,500. And in 2019, adults younger than 50 will be able to contribute up to $19,000, while those 50 and older will be able to contribute $25,000.
It’s also simply a smart financial strategy. “Contribute enough in your 401(k) to get the maximum company match,” Johnson says. “If one doesn’t contribute enough in a 401(k) plan that has a company match, one is basically turning down free money.”
Take a look at any investments that you have. “Taxpayers should review their portfolios and, to the extent they have recognized gains this year, they should consider selling securities with losses to offset those gains plus $3,000 of ordinary income,” says Sharon Lassar, professor of accountancy at the University of Denver’s Daniels College of Business. This is a strategy known as tax loss harvesting.
“Taxpayers cannot replace securities sold at a loss within 30 days of generating the loss; doing so would cause the loss to be disallowed,” she adds.
Review your retirement accounts. “Take only what you need from your retirement accounts to minimize the amount you owe and to keep your tax bracket as low as possible,” says Dave Du Val, an enrolled agent based out of Citrus Heights, California, and chief customer advocacy officer at TaxAudit.com, a service that offers assistance to taxpayers going through an audit.
But don’t take out too little money, Du Val cautions. “Taxpayers who are 70 and a half — and older — should review the required minimum distributions that are required to avoid the 50 percent tax penalty you will incur if you fail to take out the required amount out of any accounts requiring an RMD.”
Not all retirements require an RMD, such as a Roth IRA, Du Val says. In 2018, the maximum amount those younger than 50 can contribute to a Roth IRA for the 2018 tax year is $5,500. Those 50 and older may contribute up to $6,500. And in 2019, those younger than 50 will be able to contribute up to $6,000 and those 50 and up will be able to contribute up to $7,000. That said, being eligible to give the maximum amount to a Roth IRA depends on your income. For instance, you can put in the maximum amount if your modified adjusted gross income is less than $120,000 per year if single, or $189,000 if you’re married and filing jointly.
Start preparing your paperwork early. If you paid for any college or school expenses, there may be some credits you can take advantage of, including the life learning credit, which helps mitigate the costs of post-secondary education and the child and dependent care credits, which can offset the costs of babysitting or day care. “Have orderly records and keep a look out for that 1098-T form from the education institution,” Du Val says.
The form may come as late as Jan. 31, 2019, along with other tax forms like W-2s, 1099s or whatever you’re waiting for, but you can work on your record-keeping now. According to Du Val, the best thing you can do for your taxes is to get organized now.
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