With 2018 almost behind us, now is the time to think about what you can do to reduce your tax bite:
–The new Tax Reform Act almost doubled the Standard Deduction to $12,000 (single), $18,000 (head of household) and $24,000 (married filing jointly). According to the IRS, the number of taxpayers Itemizing Deductions beginning in 2018 will be about 16 million (compared to 46 million in 2017). Some deductions that you enjoyed taking in the past may not be enough to meet the new threshold, but there are still some ways to use them. For example, if you are 70 1/2 or older and have an IRA account, you must take a required minimum distribution (RMD) or be faced with a 50% tax penalty. If you donate money to charity, you can choose to have the donation come directly from your IRA (up to $100K per year). By doing so, the distribution does not count as income on your tax return, yet you still get to help your favorite charity on a tax-free basis.
–But if you’ll still be able to itemize your deductions this year, any donation you make to a qualified charity before December 31, 2018 (includes cash, check OR credit card) will be deductible on your 2018 tax return. If you donate $250 or more to an individual charity, make sure you receive an acknowledgment letter or statement from the organization. And here’s another one: Think about donating appreciated assets (such as stocks, mutual funds, real estate, etc.) to charity instead of cash before the end of 2018. You can deduct the Fair Market Value of the asset AND not have to pay Capital Gains tax. Example: Say you purchased XYZ stock for $100 years ago, and now it’s worth $1,000. If you sold it, and gave the amount to charity, you’d have to pay capital gains tax on $900, and then get a charitable deduction of $1,000 (for a net $100 benefit). BUT, if you gave the stock directly to the charity, you pay ZERO Capital Gains tax AND get a deduction of $1,000!
–Tax Tip for teachers: While you still get to deduct up to $250 in classroom expenses, unreimbursed expenses greater than that will no longer be deductible as Employee Business Expenses. Here’s the tip: Unreimbursed classroom supplies, like crayons, Kleenex, pencils, etc. can be separated out and deducted as Charitable Contributions (which are still deductible if you itemize deductions) as long as you get a donation acknowledgment from your school. Start the process now!
–If you use your vehicle for business, you must keep a mileage log for both total AND business miles driven, or the IRS can disallow your deduction. A tip I give to my clients is to always schedule a vehicle service (oil change, tire rotation, etc.) around December, so that you have an IRS-approved documentation of your vehicle’s annual odometer reading.
–If you have an Individual Retirement Account (IRA), you have until April 15, 2019 to contribute up to $5,500 ($6,500 if you’re age 50 or older) and have it count for tax year 2018. (That number goes up in 2019 to $6,000 and $7,000).
–If you’ve deducted medical expenses in the past, and now will no longer be itemizing deductions, here’s a way to still get a tax break on your medical expenses. If you have a high-deductible health insurance plan, think about setting up a Health Savings Account (HSA) before year-end. If you have a single plan, you can contribute up to $3,450 ($6,900 for a family plan). If you’re age 55 or older, you can contribute an additional $1,000. The contributions are tax-deductible, and you can use the monies to pay for IRS-qualified unreimbursed medical, dental and vision expenses. It’s not a “use-it-or-lose-it” plan– the funds stay in your account year after year. You need to set it up in 2018, but you have until April 15, 2019 to make your contribution for 2018. I highly recommend this to all my clients who have an HSA-compatible health insurance plan!
–If you’re self-employed and need more business deductions for 2018, think about stocking up on supplies, purchasing new equipment, or pre-paying some expenses like advertising or insurance. As long as you make these purchases by December 31, 2018 by either cash or credit card, you can deduct them in 2018.
–One of the most exciting (and most complicated) portion of the Tax Reform Act is the new 20% deduction for Qualified Business Income (QBI) from pass-through entities. QBI includes income from S Corporations, Partnerships, Trusts, Sole Proprietorships and Rental Income. Basically, the first 20% of your net business income is tax-free! There are limitations depending on your taxable income, as well as additional limitations if your business is a specified service business. For example, if your taxable income is below $315K (married filing jointly), you get the entire deduction. Once you exceed that amount, there is a wage limitation to consider. For service businesses, the deduction starts to phase out after the $315K taxable income, and goes to zero after $415K. If you believe your taxable income may exceed those amounts, check with your tax professional ASAP to look for ways to reduce that amount. Think about putting more money into your retirement account, hiring your kids, prepaying expenses, etc.
–If you have a business, evaluate which business entity is best for you with the new tax plan. For example, if you have an S Corporation that puts you in a tax bracket greater than the 21% flat rate for C Corporations, it may be time to make a switch. There are tax advantages and disadvantages for both (for example, the 20% QBI Deduction doesn’t apply to C Corporations), but it all depends on your situation. Of course, don’t do anything without consulting with your tax professional first!
—One final note: Remember, the states do NOT conform with the new Tax Reform Act, so, while you may not be itemizing deductions for your federal tax return, you may still need to do so for your state return!