By Harness WealthTax Planning — January 10, 2019

How to Optimize for the 2018 Tax Law Changes

2018 saw one of the most significant tax reforms in recent history. Not only are the personal and corporate tax brackets lower for 2018, but the standard deduction has doubled, several deductions and exemptions have either changed or been eliminated, and new credits are available. We explore what to consider in your 2018 tax year filing as well as a what to consider for the 2019 tax year that you can implement now.

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 2018 Tax Considerations

As you prepare your 2018 tax year filing, you need to consider how the recent tax changes will affect you and how best to address them. The good news is that there is still time to make a few last-minute contributions that may qualify as potential tax deductions for the 2018 tax year.

Determine how you are impacted

Compare your 2018 marginal tax bracket to your 2017 marginal tax bracket.

Review your completed 1040 tax return for 2017 to determine how you may be impacted by the changes to exemptions and deductions. Key items to understand are:

1. Did you take the standard deduction or itemized your deductions? The Standard Deduction has now doubled. If you itemized your taxes for 2017, compare that to the recently doubled Standard Deduction.

2. Did you deduct any eligible medical expenses that exceeded the AGI floor? The AGI floor was lowered from 10% to 7.5%. You may be able to take a higher deduction if you exceed the threshold for 2018.

3. Did you deduct any Alimony payments? Alimony payments are no longer deductible.

 

Optimize your tax strategy  

Identify new opportunities from the new tax code changes that you can put in motion for 2018. Determine if it would be more advantageous for you to take the recently doubled standard deduction or itemized deduction based on these changes. Alternatively it may be advantageous to switch off from one year to the next to maximize certain deductions.

Look into additional tax deductions that you may be eligible to take and/or contributions that you can make before the April 15th tax filing deadline to reduce your 2018 tax bill. Determine if contributions up to $5,500 each for 2018 to a Traditional IRA would qualify for a tax deduction.

 

2019 Tax Planning Strategies

Now is also the right time to put a plan in place to optimize your 2019 taxes. There are a number of ways to reduce your AGI with methods that may benefit you now and later. These include maximizing your pre-tax contributions, taking advantage of available tax deductions, and/or harvesting investment losses to offset future capital gains.

Complete a Paycheck Check-up. In order to minimize the amount that you may owe when you file your taxes, confirm that you are have elected to have the appropriate amount of taxes withheld from your paycheck. You can do so with the IRS Withholding Calculator.

Identify ways to reduce your taxable income. Key items to consider include:

  1. Consider increasing your pre-tax 401(k) contribution to reduce your AGI up to the recently increased $19,000 limit.
  2. Depending on whether you (or your spouse) have access to a 401(k) or 403(b) plan, see whether you may be eligible to take a tax deduction on contributions to a Traditional IRA of up to $6,000 each for 2019.
  3. Find out if your state offers state tax deductions on contributions to state sponsored 529 Savings plan that can now be used to fund private K-12 school or college.
  4. Review your employer benefits that allow you to make pre-tax contributions, such as Flex Spending Account (FSA) and Health Savings Account (HSA) Contributions, Dependent Care, and/or Commute Benefits.
  5. Consider whether to take advantage of the recent market volatility and look for tax loss harvesting opportunities to offset capital gains or reduce your ordinary income.

Working with a tax advisor may be especially advantageous this year to help you best navigate the complexities associated with the new tax code both for 2018 and for 2019.

 

To learn more about considerations for your Tax Planning, visit Our Impact Planning Tool