It’s Time to Get Your Federal Taxes in Order, Part 2

Getting ready for your next tax return due by April 15, 2019 should be on your mind as this year ends. That’s why Part 1 and Part 2 of this post are so important! So here is Part 2, but first…

There have been some important changes in the tax law, so now it's time to review your 2018 federal taxes and make any last-minute necessary moves.Stop and Think

Before splurging on holiday gifts this year, ask yourself if you’re going to get a big or far bigger tax bill than you’re accustomed to next year. Or if you get a tax refund, is it likely to be smaller? Millions of Americans won’t get their usual tax refunds next year because of the confusing tax law changes.

Thinking about your taxes now is essential, particularly since we started receiving more money in our paychecks in February because of changes in the payroll withholding tables under the new federal tax law. That may have been good or bad depending on what you file for 2018.

Last time, we began a process of looking at ways to improve your tax return results to give you the max benefits and to pay the least amount you legally can. Paraphrasing William Shakespeare…

“To Itemize or Not to Itemize…That is the Question!”

Looking at the new standard deduction, for most people the choice will be clear and simple. Itemizing may be a dying option for you. With a married couple being allowed to deduct $24,000 from their gross income, the chances are that they will not be able to beat that amount if they were to itemize (keep in mind that personal exemptions, which generally allowed taxpayers to reduce their taxable income by $4,050 per person have been absorbed into the standard deduction, so if you have a large family you might actually be losing money with a standard deduction now!). You have to do the math before you decide what is best for your situation. But as always, there are some that can and will, and if it’s to your advantage to do so, here’s info you need to do it right!

The new law still enables you to continue to take a tax deduction, but fewer people will reap those benefits and that’s because the standard deduction nearly doubled when the new tax law took effect. For single taxpayers, the standard deduction increased from $6,500 to $12,000; for married filing jointly taxpayers, it rose from $13,000 to $24,000. You can give thousands of dollars to charity, but if you claim the standard deduction amount on your tax return, the deductions below will do you no tax good. You must itemize expenses on Schedule A to take the following deductions. However, you can still take advantage of the credits whether you itemize or not.

Know and take advantage of any and all of these tax breaks if you can!

11. Make charitable donations

I believe you should be as charitable as possible and the percentage for tax deductible charitable cash donations by an individual taxpayer to public charities and certain other organizations has been increased this year to 60% from 50% last year.

12. The state and local tax (SALT) question

A major change that is in the new bill concerns state income taxes. This year, for 2018, state income taxes under a $10,000 deduction limit would be applied to the combined value of property taxes and state and local income taxes. The deductions for state and local sales, income, and property taxes normally deducted on a Schedule A are now reduced under the new tax rules. The amount for all state and local sales, income, and property taxes together may not exceed $10,000 ($5,000 for married taxpayers filing separately). Foreign real estate taxes are not to be deducted.

13. Maximize your medical deductions

They may still be deductible with tax revision this year if you have enough medical bills, prescriptions, or other medical costs to qualify to deduct it from taxes. Check to see if any movement, such as moving up an elective surgery, will allow you to meet the total medical deduction threshold (7.5% which was adjusted lower this year) of your adjusted gross income…it may save you hundreds of dollars if you do.

14. Mortgage interest deductions

The new tax revision modifies the home mortgage interest deduction. You may only deduct interest on your mortgage used to buy, build or improve your home. The amounts are now up to $750,000 ($375,000 for married taxpayers filing separately). For older mortgages, those taken out before December 15, 2017, the limit is $1,000,000 ($500,000 for married taxpayers filing separately).

Big change: Mortgage interest on purchase loans is still deductible under tax reform up to $750,000, but the interest on home equity loans becomes non-deductible for 2018 returns.

15. The kid tax

This tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages and salary, like dividends and interest. Taxable income attributable to net unearned income will be taxed according to the brackets applicable to trusts and estates (see above, earlier). With respect to earned income, the rules are the same as before. Previously deductions capped or phased out certain deductions. For 2018, the limitations do not apply.

16. The Child Tax Credit

The Child Tax Credit has been expanded and now is $2,000 per qualifying child and is refundable up to $1,400 (subject to phase outs). The bill now includes a temporary $500 non-refundable credit for other qualifying dependents. The phase outs will affect those with adjusted gross income (AGI) of over $400,000 for married taxpayers filing jointly and over $200,000 for all other taxpayers.

17. The Earned Income Tax Credit

For 2018, the maximum EITC amount available is $6,431 for taxpayers filing jointly who have three or more qualifying children. Income phase outs apply too, and for details, check the IRS tables that provide maximum credit amounts for them. By the way, you do not need to have any children to qualify for the EITC! Income limits are a factor so make sure you review this “gift” that the IRS is giving to those who qualify!

18. Adoption credit

For 2018, the credit allowed for an adoption of a special needs child is $13,810. The maximum credit allowed for all other adoptions is the amount of qualified expenses up to a maximum of $13,810. There are phase outs here too beginning with modified adjusted gross income (MAGI) in excess of $207,140.

19. Student loan interest deduction

For 2018, the maximum amount that you can deduct for interest paid on student loans remains $2,500. If your MAGI is in excess of $65,000 ($135,000 for joint returns), then the deduction is less until it phases out completely when your MAGI is $80,000 or more ($165,000 or more for joint returns).

20. Foreign earned income exclusion

For tax year 2018, the foreign earned income exclusion is up slightly to $103,900 from $102,100 for tax year 2017.

21. Casualty and theft losses

The deduction for personal casualty and theft losses is repealed except for those losses attributable to a federal disaster as declared by the president. Generally, this is meant to allow some relief for victims of things like hurricanes, floods, and wildfires.

22. Job expenses and miscellaneous deductions

Miscellaneous deductions which exceed 2% of your AGI have been eliminated. This includes deductions for unreimbursed employee expenses and tax preparation expenses. Expenses incurred in your job that are not reimbursed, like tools and supplies, required uniforms not used for ordinary wear are still deductible.

Moving expenses for a new job won’t be allowed as they were for 2017. In the past, expenses for moving further that 50 miles were deductible and you didn’t have to itemize deductions to get it, but that is gone for 2018 and beyond.

23. No more deductions for having your tax return prepared by professionals

Yes, bad news if that is how you have done it before. That tax deduction for professional help is now history. Just like job expenses, costs to have your taxes done were also available as miscellaneous itemized deductions. That won’t be the case anymore, and any costs for tax preparation will be non-deductible in 2018. Unless your tax returns are particularly complicated, you may want to consider doing them yourself with the help of online or standalone tax software.

And one more thing…

When it comes to tax returns, I am always appalled when I hear that people have a smile on their face because they get a large refund check from the government each year. This simply means they have overpaid their taxes through their paycheck on a regular basis. The goal of your tax bill should be to pay what you are required to pay and no more. In my world, that means planning ahead on your income and deductions (and adjusting the withholding on your W-4 form) so that you owe no additional taxes and receive little to no refund at tax time. In reality, a refund check is your own money given back to you with no interest because you’ve loaned the government your money all year for free. Does that make any sense?

I know some people have highly unpredictable incomes and would rather cover their bases, but for the majority of us, there’s no good reason to get a large tax refund when you could be getting that money in each paycheck all year long!

There’s only six weeks to go until we ring in 2019. To minimize your 2018 federal income taxes, the time to act is right now. Are you ready to get started with year-end tax moves and tax prep for 2018?


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