Written by Joseph N. Geier, CPA
We’ve all heard the saying, “nothing is certain in life except death and taxes.” I’d like to make the argument that it really should say, “nothing is certain in life except death and payment of taxes.” Tax law is not static. Rules, thresholds, credits, deductions, and strategies change from time to time. It is crucial that taxpayers stay informed and up to date year to year. It is equally important to stay abreast of the latest tips and adjust your strategies to the current tax environment, otherwise, you may as well be lost at sea.
Review & Adjust Your Withholdings
If you have too little taken out of each paycheck, you’ll owe money when you file your return, and possibly even owe penalties for underpayment. If too much money is withheld, you’ll get a refund. While refunds are positive in nature, the fact that the government had free use of your money throughout the year, when you could have had it to apply to other things, is not necessarily a positive.
Revisions to the tax code take place at times, such as last year with the Tax Cuts and Jobs Act. Changes to credits, exemptions, and tax brackets could translate to having too small an amount withheld from your paycheck. Although the new rates are lower, and people receive an increased amount in their paycheck, not everyone’s tax liability will decrease this year under the new law.
Review Your Deductions
Compare your total itemized deductions to the standard deduction and determine what will yield the greatest benefit to you. For 2018:
- Single Filers: $12,000
- Heads of Household: $18,000
- Married Filing Jointly: $24,000
(Note: These standard deductions are indexed for inflation so can be expected to increase somewhat).
Consider combining deductions in the same year when possible. This, of course, is for those who fall into the category of exceeding the standard deduction figure, which will be fewer taxpayers than in previous years. Starting in 2018, the maximum deduction for all state and local taxes paid (including state and local income taxes, and property taxes) is capped at a maximum of $10,000. Another change implemented is mortgage interest is deductible on only the first $750,000 of acquisition indebtedness (down from $1M of debt principal) and interest on home equity loans is removed entirely. As stated, if you are close to being in a position to itemize, combining or “lumping” your deductions into the same year can help taxpayers clear the standard deduction threshold.
If you are itemizing and not subject to the alternative minimum tax, consider paying your state estimated income taxes by year-end to deduct them this year. If it will benefit you more to deduct your state estimates for the 4th quarter in 2019, then hold off paying them until January.
Max Out Your Tax-Deferred Retirement Contributions
Consider boosting pre-tax contributions to your retirement plan. These contributions reduce your taxable income.
Consider Tax Loss Harvesting
If you are holding onto a losing investment (positions with unrealized losses) and are willing to consider letting it go, use it to offset your capital gains tax.
Review Your Capital Gains/Losses
Long-term capital gains have their own tax brackets in 2018:
- Single Taxpayer: Income of $425,801 or greater
- Head of Household: Income of $452,401 or greater
- Married Filing Jointly: Income of $479,001 or greater
For all the individuals referenced above, long-term gains will be taxed at 20% instead of 15%.
Additionally, you can:
- Consider holding your investment for at least one year and one day so it can be treated as a long-term capital gain rather than a short-term capital gain. Long-term capital gains are taxed at much more favorable rates than short-term gains.
- Make sure carryover losses are applied to short-term gains when possible.
- Avoid repurchasing investments sold at a loss within 30 days because this will create a wash sale.
- Consider using like-kind exchanges or installment sales to defer gains to a future year.
Review Your Wages
Delay exercising incentive stock options and consider pushing out payment of year-end work bonuses until the following year to lower your income.
Understand the Tax Cuts & Jobs Act (TCJA) & How It Affects You
This act went into effect January 2018. These terms are expected to govern most of the tax code through tax year 2025. At times, Congress implements changes to the tax code when they are adjusting the national budget. Keep your eyes and ears open for these potential changes from December – February. Some of the noteworthy changes are:
- If you itemize, the medical expense deduction decreased from 10% of your AGI to 7.5% through 2018. In 2019, this figure will go back to 10%. You may want to consider paying additional medical expenses before year-end to be eligible for this deduction.
- The personal exemption has been eliminated.
- The Child Tax Credit has been increased from $1,000 to $2,000. The new tax bill also makes up to $1,400 of the credit refundable. However, the refundable portion is capped at 15% of your earned income in excess of $4,500. Income thresholds for this credit have also increased:
- Max AGI for full credit
- Single: $200,000
- Married Filing Jointly: $400,000
- Head of Household: $200,000
- Married Filing Separately: $200,000
- Max AGI for full credit
- The exemption amounts for the alternative minimum tax have increased to $191,500 for married filing jointly and $95,750 for all others.
- Property tax deduction is now capped at $10,000 total for both property and state income taxes or sales taxes. Tax must be assessed before you can claim this deduction.
For Business Owners
- Consider making payroll tax deposits this year so you can deduct Q4 payroll taxes this year.
- Don’t collect on accounts receivable until next year.
- Spend on tax-deductible expenses (equipment, supplies, etc.).
This, by no means, is an exhaustive list. It is a snapshot of some of the changes affecting taxpayers this year, and some tips and strategies to consider before year-end. Entering tax season without proper preparation is like heading out to sea during a storm with a faulty motor and no GPS. Don’t put yourself in that position. Speak with your tax advisor.
The Value in Using a Tax Advisor
You earned it, you deserve to keep it. These tax strategies have proven effective in reducing the amount of tax you and your family will pay now and in the future. The less tax you pay, the more you have to invest, which will allow your overall wealth to grow. As your assets accumulate, several of these techniques will allow you to transfer money to families or charities without being subject to transfer, gift, or estate taxes. Tax implications must be considered in every financial situation. Through careful planning and sophisticated tax strategies, Geier Asset Management will save you a significant amount of money throughout your life.
If you are looking for a trustworthy financial advisory team in Maryland, look no further than Geier Asset Management. Contact us online or call us to speak with our tax planning advisors.
In addition to tax planning services, our team offers tax return preparation services.
Sources: The Source, Motley Fool, Kiplinger
© Geier Asset Management, Inc. Dec. 2018. Joseph N. Geier, CPA is President of Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of December 2018 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.