It’s Time to Get Your Federal Taxes in Order, Part 1

This year, for 2018, it’s more confusing than ever to try to get yourself ready for income tax season and decide on your deductions, if any, because of the changes that the tax bill passed earlier this year in congress. So you should start to get your federal taxes in order now.

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.

Check Your Withholding

The IRS says that checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year. The average tax refund was $2,825 in 2018, up $9 from 2017, based on IRS data.

Because of the changes in this year’s tax laws, about 30 million Americans—or 21% of taxpayers—are not withholding enough to cover the taxes due, according to a simulation listed in the U.S. Government Accountability Office (GAO) report. That’s up from 18% if the tax laws had not been changed. That translates to over 6,000,000 tax payers!

About 73% of taxpayers with wages are having too much tax withheld and would receive a refund, based on simulations run by the Treasury Department. That’s down from 76% if the tax laws had not changed.

But, even with those changes made, the time to take action on getting all of your “stuff” together and making any last minute adjustments is now! Yes, you need information and a little bit of caution but you can plan exactly what will benefit you the most by getting a jump on that April 15, 2019 deadline!

Here’s How to Get Going

There is still time to make some smart money moves that can help pay the least tax you should pay on 2018 income. Again this year I have compiled my best tax tips to reduce stress and the federal income tax you’ll pay.

1. First, take a look at last year’s 2017 tax return

Always start with your last return to see if any opportunities were missed, erred, or that you can carry over for 2018. If you did make a mistake, it’s not too late to amend your return.

2. Double check your W-4 forms

(Or your quarterly tax payments if self-employed) Adjust any withholding so your regular paychecks give you the right amount of income for this coming year. Last January, the tax tables were still in a state of confusion when the laws changed and many taxpayers may have had the wrong amount taken out and it may never have been corrected!

3. The Required Minimum Distribution (RMD)

Seniors who have a traditional 401(k) or IRA account must take a required minimum distribution each year once they reach age 70½. If you fail to do so, there are serious dollar penalties! Those who don’t need this money for their living expenses may want to consider having it sent directly to a charity as a qualified charitable distribution and avoid the penalty that way. If you take it out as a qualified charitable distribution, it doesn’t increase your adjusted gross income and can also hold down the amount of Social Security that is taxed. You must do an RMD distribution from an IRA plan (minimums are a must for people 70½ years old) by year’s end or suffer a tax penalty of up to 50% of the amount on your new return!

4. Maxing out your retirement plan contributions

Here’s the easy part. The 2018 IRA contribution limit of $5,500 is the same as it was in 2017. But, beginning in January 2019 it will increase. A few notes. First, the limit is per person, not per account. You can have more than one IRA—I have a traditional IRA and a Roth IRA—but your total contributions for 2018 cannot exceed the limit.

Second, although the limit is for 2018, there’s actually a longer window in which you’re allowed to make your contributions. Specifically, you have until each year’s tax deadline to make your IRA contributions. For 2018, this means you can make your contributions from January 1, 2018 through April 15, 2019.

Finally, you need to have earned income in order to contribute to an IRA, which includes salaries, wages, tips, bonuses, or income from a business you operate. Things like investment income and other passive sources don’t count. So technically, the IRA contribution limit is $5,500 (or $6,500 if over age 50) of your total earned income, whichever is less.

Yes, you do have until April 15th to do this, but remember that the sooner you do it, the sooner your money starts to grow, so don’t wait until the last minute.

5. Defer income and bonuses

Some workers might want to consider asking their bosses to wait until after the New Year to send any bonus checks. You may be better off delaying income until 2019 if it changes the tax rate you may be in. An example would be a year-end commission or bonus which may be deferred by a few days and save you money.

6. Start a college savings 529 Plan

If you’re a parent or a grandparent, you can set up a 529 Plan (College Tuition Savings Plan) before the end of the year which goes toward paying college costs when you need them. While the contributions are federally taxed, many states offer a tax deduction and the earnings grow tax free. Check details online or consult a financial advisor right away. Or consider a Roth IRA for your dual college and retirement savings if you’re starting early.

7. Gifts to family

It is the time of the year for giving gifts! This year, for 2018, you may gift up to $15,000 to any individual you’d like and although it’s not a tax deduction, it will save the receivers any tax on that gift. This may save future estate taxes by gifting money now rather than passing it on as an inheritance later.

8. Converting money from a traditional to a Roth IRA

Withdrawals from traditional IRAs are taxed in retirement, but distributions from Roth IRAs are tax-free. Money can be converted from a traditional to a Roth account prior to retirement, but taxes must be paid on the converted amount. You “pick your poison” here and the conversion have both pros and cons. Tax experts say people should be careful with the amount they convert so it doesn’t bump them into a new higher tax bracket.

9. Harvest your capital losses and take your capital gains

If you own stocks that have lost money, you can sell them and deduct up to $3,000 of those losses on your federal taxes. Just be careful not to violate the wash sale rule, which states you cannot purchase the same or a substantially similar stock within 30 days before or after its sale.

Take your capital gains if your stocks have appreciated significantly in value. If you are in the 10% or 12% bracket, the long-term gains tax rate is zero. Sell them in a higher tax bracket and buy the stock back the next day to reset the basis. By resetting the basis, taxpayers can minimize the amount of tax they could pay on any future gains.

10. You may not need to itemize this year

Taxpayers who itemized deductions for 2017 may not need to do it in 2018. Because the standard deduction is doubled in the new tax bill, it may not pay you to itemize deductions this year at all. That will make a major change in the number of people who need to itemize to save and make filing a return faster and easier too.

In Part 2, we will look at even more changes and preparation to itemize deductions for your 2018 return. Stay tuned!

Are you prepared for the 2018 tax filings? Are you going to be in a panic mode trying to organize for April 15, 2019’s deadline or are you going to start the wheels rolling now to get and save every penny you deserve in the “me” column?

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