Tax Season: File now, prepare for next year
Now is a good time to make adjustments to withholdings and revise your financial plan to help prepare for the 2019 tax filing season when it happens in early 2020.
However, most people are just now thinking about filing their 2018 taxes, but it’s never too early to start planning for next year’s tax season.
Check your income tax withholdings
While the new tax law reduced the tax rates applicable to most brackets, it also reduced or removed many deductions or credits. As you begin to prepare your 2018 taxes and begin to see the impact of the new tax act, it’s the perfect time to review your W-4 and withholding elections. If you are under-withholding, the good news is that the IRS is offering relief for 2018 by lowering the required prepayment amount from 90 to 85 percent. However, that is unlikely to continue for 2019 and you may be hit with a big tax bill next April. Conversely, if you have been over-withholding, but adjust now, you may get a bump in your take-home pay for the rest of the year.
Increased contribution amounts for IRAs, 401(k)s and HSAs
The IRS recently released the inflation adjustments for 2019 for retirement plans. The annual tax-deductible amount for IRA contributions increases in 2019 from $5,500 per individual to $6,000 – and the catch-up limit for those 50 and older increases to $7,000. The tax-deductible amount for employee contributions to 401(k)s also increases in 2019 from $18,500 to $19,000. In addition, tax-deductible HSA contribution limits increased by $50 to $3,500 for an individual and by $100 to $7,000 for a family.
Expanded uses for 529 plans
The new tax law has expanded what expenses can be paid by a 529 plan. A 529 plan is a tax-advantaged account designed to pay for an individual’s education expenses. Distributions from the 529 plan for education expenses are made tax-free and are not included in the individual’s income. The use of the 529 plan for any other purpose will mean that any distributions will be included in that individual’s income (and may incur an excise tax as well).
Under the prior law, these distributions were limited to college or university expenses, such as tuition, fees, books, etc., but the new law expanded this to cover public, private or parochial elementary or secondary education (K-12) tuition expenses.
Control your capital losses and gains
As always, it’s important to manage when you’re incurring capital losses or gains from your investments. This is because losses or gains play a role in determining whether you qualify for certain income-based credits or avoid certain income-based taxes. For instance, the 3.8 percent net investment income tax applies once adjusted gross income (AGI) exceeds $200,000 for a year ($250,000 for married couples filing jointly). If you’re near this threshold, you could sell under-performing stocks and use that loss to offset any gains you might have made from better-performing stocks, which in turn could help you fall under the AGI threshold and avoid the 3.8 percent tax.
Impact on charitable deductions
Because the standard deduction has nearly doubled (from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly), there is less incentive to itemize deductions, including charitable donations. One planning opportunity, however, is to bunch charitable gifts into a single tax year instead of spreading them out. For example, if you plan to gift $2,000 in 2019 and another $2,000 in 2020, you may not have gifted enough each year to claim the donations as an itemized deduction. But if you accelerated the 2020 gift and gave a total of $4,000 in 2019, that might be enough to be able to itemize and deduct while still meeting your charitable goals.
The new tax law also increased the cap on the amount of cash contributions to public charities that qualify for a deduction. The cap is based on a portion of the donor’s AGI, and was raised from 50 percent of AGI to 60 percent of AGI.
It’s also worth noting that gifting appreciated stock, instead of selling the stock and giving the cash, can give a double tax benefit as you may be able to both deduct the full market value of the stock and avoid taxes on the built-in capital gain.
The tax law changes may have caused some surprises for filers this year, which is all the more reason to use the 2018 filing season to prepare for 2019 filings. Review your withholdings and your financial plan, and reach out to your lawyer and/or financial advisor for guidance on how to make adjustments.
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