Tis the holiday season. It’s time to deck the halls, finish your gift shopping, settle on that dinner menu — and start planning to minimize your 2019 tax bill.
Sorry. I don’t mean to dampen your holiday spirit. But I just want you to ring in the New Year knowing how the new tax law will impact your situation. My goal is to help ensure you get back as much as possible from Uncle Sam (or pay as little as possible) next tax season. Think of it as my holiday gift to you.
Here are five questions to ask yourself – or, better yet, a financial and tax expert – before we turn the corner into 2019.
1. To Itemize or not to itemize for 2018?
Under the new tax regulations, the standard deduction almost doubled for 2018 – up to $12,000 for singer filers (from $6,350), and $24,000 for married couples filing jointly (from $12,700). And, according to the Tax Foundation, an independent tax policy research outfit, around 29 million people who itemized in the past will likely file using the standard deduction in 2018. That means 90% of Americans will now use the standard deduction, up from 70% in 2017.
For former itemizers, knowing which way you will file for 2018 can save you money. How you plan to file could impact your decision on year-end expenditures that generate itemized deductions. For example, if you won’t be itemizing, you won’t be deducting for things like charitable gifts.
2. Are You Withholding Enough to Cover Your Liability?
The tax reform dropped tax rates for most Americans and eliminated the personal exemption. It’s important to run the numbers for your current employment withholdings to make sure you’re not under-withholding or over-withholding.
If you find that you’ve been under-withholding, you may want to ask your employer to increase your deductions in December, so you don’t get hit with a large bill come tax time. If you are self-employed and pay quarterly estimated taxes, increase your January payment, which covers the fourth quarter of 2018.
3. What Deductions Are Still on The Table?
The new law eliminated many tax write-offs. For instance, you can no longer write-off unreimbursed employee expenses. Similarly, if you have a home-equity line of credit or loan, you’re no longer able to deduct the interest for any portion of the debt that was used for a non-home related purpose, say, for financing your child’s college tuition.
The flip side is that if you own a small business, you can still deduct your business expenses.
Additionally, you also can exclude the first 20% of your income from any taxation if your income falls under certain limits. Individuals with very high medical expenses will also get a tax break for 2018, as you can still deduct for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI).
If you’re still planning to itemize, consider talking to a pro about your deductions to maximize your savings.
4. What About Charitable Contributions?
For charitable contributions, it may be a good idea to consult with a tax adviser about whether you should set up a donor-advised fund. You put money and appreciated investments into the fund, and take an itemized deduction for 2018 for the full amount of your transfer.
A tax expert can also tell you whether it makes sense to “bunch” deductions in alternate years – meaning contributing twice as much to charity in one year and nothing or very little the next. Using this system, you’d itemize one year and take the standard deduction the next. Still, with a donor-advised fund, you get a choice of when you want the money disbursed to the charities. And, aside from these tax benefits, donor-advised funds let donors simplify recordkeeping into a tax receipt from a single organization.
If you’re age 70½ or older, consider asking a tax pro about using your IRA to donate directly to a charity using all, or a portion of, your required minimum distribution. Under this option, you won’t get a deduction; but that distribution won’t be counted as part of your income, meaning you’ll pay less in taxes on your required withdrawals.
5. Are There Any Year-End Investment Changes to Make?
In light of the market volatility we’ve experienced this year, keep in mind that up to $3,000 of taxable losses that exceed taxable gains can be deducted on your 2018 return, and you can carry forward additional losses into subsequent tax years.
As for capital gains and losses, rates haven’t changed under the new tax regime. And, neither have the general rules that govern how to handle year-end transactions to benefit you tax-wise. But there are some new rules that may benefit your bottom line. If you stand to owe for capital gains from on a transaction this year, talk with your investment advisor and a tax professional to see if there is a way to mitigate the tax you’ll owe.