Taxpayers may be surprised by the significant adjustments that go into effect for the 2018 tax year – the return that you’ll file with the IRS this spring – brought on by the Tax Cuts and Jobs Act (TCJA).
The tax law passed in December 2017 made several modifications to both individual and business taxes. These changes include reforms to itemized deductions and alternative minimum tax, an expanded standard deduction and child tax credit, and lower marginal tax rates across brackets.
As with most tax changes, there are good and bad aspects of the TCJA.
The good: Standard deductions have practically doubled since 2017, which is helpful for taxpayers who could not itemize in the past.
The bad: Under the TCJA, new limits apply to some itemized deductions, including deductions for state and local taxes paid for mortgage interest.
Given the importance of these changes, there are a few things you’ll want to do early in 2019 to avoid future tax issues when filing your return.
Here are the 4 tax tips to start off your year right:
Right-Size Your Tax Withholdings
Getting a big refund can be fun, but that’s money you could have been using all year. Owing a lot unexpectedly definitely is not a good thing either. Tax planning can help.
Tax planning is the analysis of your financial situation with the goal of creating long and short-term strategies to meet your tax obligations without overpaying — or underpaying!
Part of your tax planning should be to “right-size” your payroll withholdings for 2019.
If you’ve been making estimated quarterly tax payments for yourself or your business, you may want to make adjustments there, too.
Your tax liability can be affected by the recent changes in tax rates, standard and itemized deductions, and the elimination of personal exemptions, among other tax changes.
Because of this, you’ll need to adjust your tax payments or withholdings. If you need to set up an estimated tax payment or would like guidance on what you can expect in 2019, consult with us!
Increase Retirement Savings
Are you maxing out your 401(k), or at the very least contributing enough to get your employer’s full match? What about your IRA?
2019 is the perfect year to add to your retirement savings!
The limits for individual retirement accounts have been increased, which means potential retirees can save up to $6,000 in their IRA.
For employees who participate in 401(k) plans in 2019, pretax funds will be $19,000, an increase from $18,500 in 2018. You may also want to look at your 403(b), Thrift Savings and other retirement plans with us this year.
For those 50 and older, catch-up contributions remain the same.
Manage Your Medical Expenses
There are tax benefits to both Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA).
With the TCJA in place, higher standard deductions make it more difficult to write off medical expenses. By establishing an HSA, you might be able to alleviate some of these expenses.
With an HSA, a tax deduction of up to $3,500 for a single person, or up to $7,000 for a family is possible in 2019 without needing to itemize your deductions.
FSA, on the other hand, have significantly smaller contribution limits with a 2019 maximum of $2,700. Limitations on FSAs include losing any unused benefits by the end of the year and rare exceptions from employers.
Make an appointment to speak with us if you plan any major life changes this year, whether it’s buying a home, starting a new business, growing your family or sending a child to college. Even if those things aren’t happening to you this year, 2019 can be a good year to start planning for those big life events!