By Jack Krumeich-Miller, E.A. | December 22, 2018
As the year comes to a close, there is still a window of time to make your last tax moves to prepare for filing season and get the most from your tax situation. There are five specific retirement tax planning tips this article will focus on:
- Itemizing Deductions has changed for 2018 – The new standard deductions increased because of the Tax Cuts and Jobs Act. The standard deductions are now $12,000 for single filers and those married filing separately. $18,000 for Head of Household. $24,000 for those married filing jointly. There are also limitations and removal of what could be itemized. SALT deduction (State and Local Tax) has a limit of $10,000. Unreimbursed employee expenses and other miscellaneous deductions are not available anymore. You can still deduct medical expenses that exceed 7.5% of your AGI (adjusted gross income) for 2018 and 10% of your AGI in 2019 and charitable contributions to qualified organizations. With that in mind, it is harder for these deductible expenses to exceed the standard deductions. A strategy called “bunching” can be used to bunch unclaimed deductions from prior tax years or future years and deduct them all in one tax year where you know it will be enough to exceed the standard deduction. Bunching works specifically by paying ahead of time or waiting till the year you want to deduct them to pay them. If you have a medical expense in 2018, and you wait to pay it until 2019, you can deduct it in 2019. If you want to make your 2019 charitable contributions in 2018, you can deduct them in 2018.
- If you are 70 ½ or older and have RMDs (Required Minimum Distributions) on your traditional IRA, you can reduce or eliminate them by donating a portion of them directly to any qualified charitable organization. This is called a Qualified Charitable Distribution. (QCD) The portion of your RMD that is used for the QCD is not included in your income and it is also not included in your itemized deductions. This can provide nice tax savings. You can also donate more than your RMD this way to charity. In fact, a person is allowed to donate from their IRA as a QCD up to $100,000 annually!
- If you have any concerns about not paying enough each quarter in estimated taxes, or didn’t withhold enough in your paychecks, you can take an IRA distribution s to use toward the estimated taxes you will owe in 2018. This strategy works because any money withheld from an IRA distribution and sent directly to the IRS as a tax withholding is considered received equally throughout the year even though the IRS receives it in one lump-sum. It works by requesting a distribution for the amount you think you need to pay in estimated taxes for 2018 and have your IRA custodian send 100% of the distribution to the IRS as a tax withholding. This process could eliminate any potential underpayment of estimated tax penalties even if you missed a quarterly payment during the tax year.
- If you see yourself in a higher income tax bracket for 2018 than you would be in 2019 because of any year-end bonuses, see if you can postpone the bonus income payout until 2019. On the flip side, if you see yourself in a lower tax bracket in 2018 than you would be in 2019, it may be beneficial to accelerate your income to be paid out in 2018 where possible.
- Start planning for next year’s taxes. Identify any benefits you may qualify for or that are provided by your employer (401(k), HSA, FSA, etc.) which you can take advantage of to potentially lower your taxable income in 2019. You can see what tax bracket or tax situation you have for 2018 and decide what actions to take to potentially change your tax situation to be more favorable in 2019.
If you have any questions about these and other tax planning tips and tricks you have read or heard about, contact our office and we are happy to discuss them with you. There are several changes in how taxes work because of the Tax Changes and Jobs Act, and we can help guide you through them to make sure you have the best tax situation available to you. And remember, we are continuing to bring on additional clients for tax preparation services so if you would like us to prepare your taxes please let us know!