It’s been almost a year since President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The Act contained changes that simplify the individual income tax for millions of filers, including an expanded standard deduction that may make itemizing unnecessary. According to the Tax Foundation, the IRS estimates that individuals will be able to spend less time completing their tax return. However, it still makes sense to position yourself now to minimize the amount of tax you’ll need to pay when you file.
Before the close of 2018, I recommend that you take a few hours to do a little tax planning for this year and next. Consider it a gift to your future self! Your areas of focus should include:
- Examining your tax bracket. Did you adjust your withholding after the TCJA passed? If you did, good for you. But if you didn’t, you could wind up owing the IRS come April. Before the end of the year, take a look at your tax bracket under TCJA, and examine ways you might be able to lower your tax bill now and in the future. You may be able to contribute to a traditional IRA (a tax-deferred investment) before the end of the year. Don’t forget, though, that the amount you can deduct depends on how much you make, your age, and whether you or your spouse participate in a retirement plan through your jobs. You might also consider converting your IRA to a Roth while tax rates are lower now to save long-term.
Speaking of work retirement plans, have you contributed the maximum amount this year? If you participate in a 401(k) through your employer, and are under the age of 50, you can contribute up to $18,500. Those of you who are over 50 can add an additional $6,000 as a “catch-up” contribution. If you need to lower your taxable income for 2018, talk to your employer to see if you can add to your contribution before the end of the year. (By the way, in 2019, individuals under the age of 50 can contribute up to $19,000!)
- “Bunching” your charitable contributions. As I discussed in a previous blog, you can still itemize charitable deductions, but under the TCJA, many will find it more difficult to exceed the standard deduction. One alternative is to “bunch” your charitable contributions, by contributing a larger amount every other year, instead of smaller amounts every year. That way, at least every other year, you can take advantage of itemizing.
- Contributing to your Health Savings Account. If you participate in a high-deductible health insurance plan, you can contribute pre-tax dollars to a Health Savings Account, or HSA. Unlike Flexible Spending Accounts, or FSAs, there’s no “use it or lose it” provision, so if you contribute to your HSA, the funds will roll over and you will be able to use them anytime. The funds in your HSA can also be invested in the stock market (check with your plan administrator to learn more). Individuals may contribute up to $3,450 in an HSA this year, and couples may contribute up to $6,900.
- Contributing to a 529 plan. For those who wish to save for a child’s education, contributing to a 529 plan may provide an opportunity for tax savings. (A 529 plan is a tax-advantaged savings plan that enables people to save for certain educational expenses.) While you won’t be able to claim a 529 plan deduction on your federal income tax return, Michigan residents can receive a tax benefit by contributing to the Michigan Education Savings Program.
- Paying tax on assets you intend to pass to beneficiaries.If you are a retiree, and you plan to leave your assets to others instead of spending them yourself, think about whether it makes sense to pay the tax on those assets now, at possibly lower rates, so your heirs won’t have to. One option would be to convert your traditional IRA to Roth, so money in the account will continue to grow tax free.
- Considering additional retirement plans for 2019. This is a perfect opportunity for entrepreneurs to look ahead to shelter more income in 2019, especially if they are paying high taxes this year. Why not save more for retirement and pay yourself instead of the government?
Before your holiday plans start to take over your free time this month, I encourage you to steal away to a quiet place and take stock of your tax situation. When considering these options, remember that your results depend on a number of factors, so any tax savings you realize will likely be different from those of your friends or family members. If you need help, please don’t hesitate to contact us. At AMDG Financial, our process includes integrating tax, financial and investment strategies to help our clients make financial and life transitions on purpose. It would be our privilege to work with you.