Many people and business owners make the mistake of starting to plan for taxes in November or December each year. By then, you will need to scramble to take advantage of some types of tax benefits, or they may not be available to you any longer at all. Starting the planning process now can help you not only get a jump start on tax season, but it can save you money as well.
Consider Whether You Should Take the Standard Deduction or Itemize for 2018.
The standard deduction has increased significantly for 2018. In fact, it has almost doubled for both individuals and couples. That means the fewer people will itemize this coming year because it will not be as beneficial as simply using the standard deduction. That means that you may not need to keep records of things like home loan interest, medical expenses, or donations to charity. If you do not have to itemize, that can cut down significantly on the spending that you need to track or the receipts you need to keep.
Certain expenses that you were permitted to deduct before are no longer deductible, however. This includes things like:
- Foreign real estate taxes
- Unreimbursed employee expenses
- Tax preparation fees
- Investment fees
- Costs associated with safety deposit boxes
- Interest on home equity loans
- Moving expenses related to a job change
There are also specific caps that will apply to other deductions as well, such as new mortgages that are over $750,000 and sales and real estate taxes at the state and local level.
The limit to deduct medical expenses has been reduced to 7.5%, but it will increase for 2019. That means that if you have been putting off any big procedures, now may be a good time to get them done—if you are still going to itemize for 2018.
Determine how the Overall Tax Decrease Will Affect You.
The highest tax rates have fallen from 39.6% to 37%. For many, this will be a welcome change. You may want to adjust your W-4 withholdings to account for the decrease your overall tax obligations properly.
This decrease also applies to sole proprietorships, as they have the same tax rate as their individual owners. Pass-through entities, such as sole proprietorships, partnerships, and Limited Liability Companies will also have lower taxes as well. From 2018 to 2025, these entities will be able to deduct 20% of their Qualified Business Income. The corporate tax rate has also been lowered. For many small businesses, this change will significantly free up funds to invest in other aspects of the company. Proper planning can help you take advantage of this tax savings right away.
Consider Increasing Your Retirement Contributions.
The limitation for amounts that you can contribute to your 401(k) has increased to $18,500 for 2018. If you are already adding the maximum value, that may mean that you should make some slight adjustments to increase your contribution.
Other important retirement amounts have also been changed. For example, you can now increase your overall contribution to a defined IRA plan to $55,000, which is very helpful for those who are self-employed or own a small business. You can also divert up to $130,000 (which is an increase of $5,000) of your IRA or 401(k) to a qualified longevity annuity contract (QLAC). These investment tools give you guaranteed retirement income for life.
Alter Your Gifting Plans.
Gifting free from income tax is often an essential part of an individual’s long-term estate planning. If gifting over several years is in your future, you may want to make some changes to your plan. The gift tax exemption has been increased from $14,000 to $15,000. That means that you can gift up to $1,000 than last year without worrying about the income tax implications.
Getting Help with Your Plan
It may be a good idea to involve a tax and estate planning attorney this year, even if you haven’t in the past. The new tax laws can significantly affect your tax planning and even your estate plan. Contact our team to set up an appointment.