Tax Day is Over, But Tax Planning Isn’t
If you filed your tax return on time, congratulations on avoiding costly late-filing penalties! With so many tax changes going into effect with tax reform, you may not want to wait until next March to start thinking about next year’s taxes. Tax planning should actually be top-of-mind year round.In fact, there are several things you can start thinking about now to minimize your tax liability and maximize your cash flow for 2018. Here are four ideas:
Tax Planning Tip #1:
Estimate Your 2018 Tax Liability and Adjust Your W-4
Before you implement a new tax planning strategy, estimate your 2018 tax liability. If you went to a Block Advisors office to complete your tax return, you should have already received an estimate. If you went somewhere else, you may need to use a 2018 tax calculator to get a rough estimate of how the new tax law will impact you. Once you know your new baseline, consider adjusting your W-4 to reflect the new tax law.
While some taxpayers prefer to withhold more than the required amount to get a larger refund, others prefer to take home as much money during the year as possible, even if they end up owing taxes when they file. Whatever strategy suits you, make sure you have enough withheld to avoid tax penalties. That means withholding at least 90% of your total tax liability or 100% of your 2017 tax liability, whichever is smaller.
If you are self-employed, your estimated tax payments may be more difficult to estimate this year. This is because a new tax benefit for self-employed taxpayers (as well as partners and S Corporation shareholders) is rather complicated to calculate. Depending on your income type and amount and whether you pay yourself wages, you may be able to deduct up to 20% of your net self-employment income on your 2018 tax return.
Tax Planning Tip #2:
Adjust your Retirement Savings Account Contributions
Most taxpayers will be in a lower marginal tax bracket in 2018, which decreases some of the tax advantages associated with your tax-deferred savings account contributions, like your 401(k), IRA or HSA. For example, if you were in the 25% bracket in 2017, you may be in the 22% bracket in 2018. That means every $100 you contribute to a tax-deferred savings account saves you $22 dollars in 2018 federal income tax compared to $25 in 2017 federal income tax. Still, you’re lowering your taxable income by the amount of your savings so there is still a benefit to tax-advantaged accounts. Also, you may be in a lower tax bracket in the future when you withdraw your savings, which is another benefit to saving in these accounts.
You may want to consider contributing to a Roth IRA instead of a traditional IRA in 2018 if you think you may be in a higher tax bracket in the future. With Roth IRAs, you’re investing your income after paying taxes on it. So, when you take out the money in the future, you won’t owe any taxes on it – even if you’re in a higher tax bracket. But before deciding, make sure you understand how that strategy would affect your state income tax and any other income-related benefits, such as income-based student loan repayment plans.
Tax Planning Tip #3:
Plan to Minimize the Loss of Itemized Deductions
Many taxpayers will stop itemizing in 2018. And people who do itemize generally won’t get as much of a benefit from doing so. That’s because the standard deduction increased, while dependent exemptions and several itemized deductions were limited or eliminated.
For example, homeowners who live in high-tax states probably won’t be able to deduct all of their state and local income tax and real estate tax next year. That’s because the new law limits the deduction for state and local taxes to $10,000.
Also, many people who itemized in the past and deducted their charitable contributions won’t anymore because the new standard deduction will be more than total itemized deductions. One strategy some people are considering is to concentrate their charitable giving for two (or more) years into one year. That way, they may be able to itemize and deduct at least some of their charitable contributions.
One more significant change impacts employees who pay business expenses out-of-pocket and aren’t reimbursed by their employer. In prior years, employee expenses were deductible as itemized deductions. Beginning in 2018, that deduction is gone.
Tax Planning Tip #3:
Need Another Tax Return Review?
Are you sure you got the best tax outcome last year? You might not have claimed every credit or deduction possible – and that means missed money.
At Block Advisors, we offer a Second Look® on your tax return – for up to three years – at no cost to ensure accuracy and check for oversights or mistakes. Learn more about Second Look® at www.blockadvisors.com.
If you want to be prepared by tax planning but don’t know where to begin, a Block Advisors tax professional can help you focus on the changes that impact you. They will help you create a customized tax plan that fits your specific situation – so you can avoid surprises at tax time. Find an experienced tax advisor now.