You or your business are probably paying less to Uncle Sam this year, which means it’s time to start looking at taxes different.
With tax rates slashed at virtually every level, many businesses are using their savings to raise pay and bonuses for their employees. The employees, in turn, under the revised tax brackets, will be paying lower taxes on those bonuses and higher wages.
If, like most average taxpayers, your tax rate is lower beginning with your first January 2018 paycheck, you should consider some new strategies and adjustments so that you won’t be surprised when April 15, 2019 rolls around.
Here are some tips.
Double Check Your New Tax Bracket
The new tax law increases the income limits and distributes them throughout 7 new tax brackets. If after applying your total deductions your 2018 annual taxable income is in the range of $50,000, you will likely see more money in your paycheck. You can get a quick calculation on your new monthly tax bill at Calculator.net’s take-home-paycheck calculator.
Earmark That Extra Money for Savings or Debt Payments
Now that you have a ballpark figure, check it against your pay statement. If your take-home pay increased by, say, $70, take that windfall and stash it in a retirement fund. Or you could work on paying down your credit card debt and avoiding that usurious (as in legally excessive) interest your bank charges. You won’t miss the money, because last December you didn’t have it.
The second half of this good news is that when you take advantage of the new standard deduction, you will owe even less taxes than last year. So, run the numbers. It’s your money.
Should You Itemize?
Again, it’s a matter of arithmetic. If you can itemize business, medical, and other expenses, and they exceed your standard deduction. Self-employed taxpayers who make the bigger bucks usually itemize deductions and get a bigger refund.
The average taxpayer, though, will find it challenging to find enough deductions to surpass the standard deduction. However, if you are planning elective surgery or an expensive dental procedure not covered by your insurance, you could experience one-time and very expensive out-of-pocket costs, which will make the deduction worthwhile.
A quick note on medical deductions: For the years 2017 and 2018, you can deduct your medical expenses that exceed 7.5 percent of your adjusted gross income. For the tax year 2019, the threshold gets kicked back to 10 percent.
529 School Saving Rules Changed
If you have a 529 tax-advantage college-savings account, its earnings have been free from federal (and many state) taxes. Under the old rules, the savings could only be applied to higher education expenses. In 2018, you can apply your tax-exempt maximum $10,000 savings to fund tuition for public, private or religious elementary or high schools.
One Thing You Should NOT do in 2018…
If you itemize home mortgage expenses, those deductions (albeit reduced in 2018 for new mortgages) stay in effect. However, one of the many hot tax breaks going away is the former deduction allowed for home equity loans. Those were loans secured by the borrower’s home and where the borrower could write off the interest.
The new tax law does away with that deduction. Resist the temptation to take out a home equity loan to catch up on bills. Find a way to pay those bills and pay down any outstanding home equity loans, which no longer provide a tax break.
Be Aware of the Down Side
If you pay more than $10,000 state income and sales taxes, the excess is no longer deductible from your federal tax bill. This could have a big financial impact on high income earners in states like California and New York. Advice for mitigating the foregoing ranges from divesting ownership of income property to moving to Texas or Florida.
In between those options, there are expert strategies that reduce the impact of the loss of those deductions. Your best strategy is to find out what those impacts are and get expert advice from a tax accountant. Don’t wait until your 2018 federal income tax bill hits like a thunderbolt.
Regards,
Ethan Warrick
Editor
Wealth Authority
