Depending on how you look at the year, we are either one-third of the way through the tax year (four months since you last filed taxes in April 2018), or we are in the last third of the calendar year (only four months until 2019!). No matter how you count it, the end of the summer is a great time to take a look at your taxes. In 2018, this is especially important because of the sweeping tax reform that went into effect this year. Whether you realize it or not, your tax situation is likely very different than it has been in previous years. Have you checked in with a tax professional about how the new tax law will impact you?
No Surprises in 2019
Taking the time to review your tax situation now will help avoid being caught off guard in 2019. Under the new tax law, many taxpayers will owe less than previous years, but some will end up owing more. If there have been any big changes in your life in 2018, it is essential that you get the full picture of how your life changes and how the new tax law will impact your finances.
In 2018, if you
- Got a raise or changed jobs
- Got married or divorced
- Had a baby or a child turn 17
- Sent a kid off to college
- Turned 70.5 in age,
it is definitely time to take a break and sit down with your taxes. At this mid-year point, there is still time to correct any unfavorable consequences that may be caused by life events. If you wait until April 2019, it may be too late.
A change in marital status will likely change whether you file your taxes individually or jointly, and this status can dramatically change your tax liability. Under the new tax law, the dependent exemptions have been eliminated; however, the Child Tax Credit has doubled. There are a number of tax credits available to those paying college tuition. If you are planning to retire this year or have retired in the past eight months, you may be trying to decide the details of your retirement income sources. Receiving retirement income from different sources will have varying impacts on your tax liability, so it is best to consult with a professional before you start receiving distributions.
Look for Ways to Cut Down on Taxable Income
A mid-year check in can do more than reveal unexpected tax liabilities; it can also be a useful tool to reflect on how you can minimize your tax liabilities while putting more of your income to personal use. For example, you may be able to contribute more to a tax-advantaged account. In 2018, you are entitled to contribute up to $18,500 to your 401(k), 457, or 403(b). Taxpayers 50 and older can also make “catch up” contributions of up to $6,000, which allows them to contribute up to $24,500 into a 401(k) in 2018. IRA limits for 2018 are $5,500 per qualified taxpayer and $6,500 for those 50 and older.
If you have a health savings account, this is also a great way to reduce your taxable income and save on qualified medical expenses in the future. In 2018, you can contribute $3,450 for single coverage into a high deductible health plan (HDHP) and up to $6,900 for family coverage. If you are over the age of 55, you can make “catch up” contributions of an additional $1,000.
Examine Your Withholding
When the new law tax went into effect in January 2018, almost all taxpayers moved into a lower tax bracket, which should have resulted in bigger paychecks in the new year. If you have not seen a larger paycheck so far this year, you may need to adjust your withholding on your W-4. At the beginning of the year, there was a fair amount of confusion over the new tax law and employee withholding, so the IRS released a revised W-4 and new withholding tables. With ongoing confusion over the status of withholdings, it is important that you review yours to make sure that you will not end up with taxes owed or a large refund in April 2019.
Determine What You Will be Deducting This Year
Under the new tax law, the standard deduction increased to $12,000 for individuals and $24,000 for joint filers. With these higher thresholds, many taxpayers will choose not to itemize deductions, even if they have done so in the past.
A number of common deductions have also been restricted or removed in 2018. Write offs for state and local income and sales and property taxes are capped at $10,000. Home equity debt interest is no longer deductible, and the miscellaneous deductions have been removed.
Take a Closer Look at Your Charitable Giving
Along with the higher standard deduction comes a shift in how charitable giving will be treated in 2018 tax filings. Because fewer people will be itemizing their deductions, charitable giving of less than the standard deduction will have no impact on income taxes. However, taxpayers may choose to group annual giving to continue to tax advantage of deductions. For example, instead of giving $10,000 in each of the next three years, you could choose to place $30,000 into a donor-advised fund in one year, take the deduction, and then distribute those funds over each of the next three years.
If you have had significant medical expenses in 2018, or if you plan on having medical expenses in the near future, this is an important fact to raise with a tax professional. Under the 2018 tax law, the medical expenses deduction remained intact, but the threshold dropped to 7.5% of adjusted gross income. The threshold with rise again in 2019, so make sure you are planning for these changes as much as you can.
Another point to consider for older Americans is the possibility of Medicare Premium Surcharges. If modified gross income exceeds $85,000 (single filers) or $170,000 (joint filers), there will be additional surcharges in 2020, when this year’s income impacts Medicare costs. A mid-year check in can let you know if you are getting close to a threshold and try to suspend some income for the following year.
Work with an Experienced Estate Planning Attorney
With four months left in the year, there is still time to correct any unintended impacts that your current tax status may create in the next tax season. For a mid-year check up, get in touch with your tax professional and an experienced estate planning attorney. At Brian M. Douglas & Associates, we can help guide you through your mid-year checkup and help you reorganize your assets to create the best result for you and your family. Give us a call at 770-933-9009 to learn more.