With only five months left in 2018, it is probably time you start thinking about what your income taxes will look like before the end of the year. The 2018 Trump tax overhaul not only changed the entire tax table system, but there were serious alterations for individuals and small businesses that could throw a real knot in your income taxes if you don’t carefully plan. The challenge for most families is that they plan reactively versus proactively often only thinking about taxing when it is time either write a check or collect a refund. Here are my five ways to avoid a big tax surprise come March or April in 2019.
Review Your Withholdings And Do A Mock Tax Projection
- The IRS did an overhaul of the tax withholding tables and most people didn’t change their withholdings from Married 1 or Single 2 or wherever you had your overall withholdings.
- The big question you want to start with is taking a close look at your pay stubs and asking yourself how much have you paid year to date?
From there, you should look at the 2018 tax tables which can give you some idea on where the new taxable income rates sit and at least some view if you are remotely on track. Of course, you’ll have to look closely as well at your deductions which I will discuss below.
Tax Deductions May Get You SALTY
- The number one line item that will dramatically change higher income earners are the SALT- State and Local Taxes (real estate, state tax, local tax) which will be capped at $10,000 on your itemized deductions. Remember, in years prior if you earned $400,000 (let’s assume a 6% state income tax rate), that means you would have about $24,000 in state income taxes to deduct on your itemized deductions. If your real estate taxes were $8,000, for example, and $2,000 for local city taxes, you would have a total of $10,000 of real estate and local taxes in this scenario. This means you normally would have $34,000 of itemized deductions instead of the cap of $10,000 of itemized deductions for these line items. This means you need to account for the delta of what you cannot write off anymore.
- For some of you, this cap will likely cross you over to start using the new standard deduction which will be $24,000 for married couples and $12,000 for single filers.
Consider Bunching Charitable Deductions
- If you do get limited to the standard deduction, you may consider using something called donor advised funds or donate more in one tax year to bunch your deductions to actually itemize instead of making smaller charitable contributions each and every year. An example of this would be if you tithe every year to church. Let’s say you normally tithe $10,000 per year. In a normal tax year, with the cap of $10,000 on the state and local taxes, you might not get to the $24,000 standard deduction even with the $10,000 tithe. Instead, if you have the means, what you might do is make one $50,000 charitable contribution in one tax year, or if you gift the $50,000 to a donor advised fund, you can take the tax deduction in 2018 but parcel your gifts over a number of years. This is the idea behind bunching.
- If you are past the age of 70 ½ and have to make a required minimum distribution, you could consider making a required minimum distribution directly to a charity. In this scenario, the RMD is tax free because you are making the distribution directly to a charity.
Know What You Can’t Deduct Anymore
- One massive change that has vaporized this year you’re your tax deductions are the miscellaneous expenses from your itemized deductions.
- In the past, these deductions could be taken to the extent that the exceeded 2% of your adjusted gross income. In 2018, these will no longer be available and could cause a big surprise especially to sales people who would normally deduct mileage, meals and entertainment, and travel not reimbursed by their companies. Other examples include investment fees, tax preparation, etc. This means you should look back at your 2017 return and think about how much you actually deducted using this strategy in the past
Did You Sell Stock?
- The markets have been good over the past 10 years and some people are starting to take profits. You should look closely at your brokerage accounts and check your capital gains taxes for the year.
- Remember, if you held stock under one year it will be treated as regular ordinary income, and if you held it more than one year it will be treated as a long-term capital gain.
If you want to set up to look at tax planning strategies before year end, please go to oXYGen Financial to set up an appointment.