10 Tax Tips To Reduce Your Tax Bill To The IRS
Barrons.com put together a great list of ways you can offset your tax bill and lower the amount you owe. It’s always a terrible day when you get a nasty surprise and realize you owe more in taxes than you thought you would owe. Take heed of some of the below suggestions to still minimize some of what you will owe, if you haven’t already. Also keep in mind that TCJA that went into effect this year will give you new restrictions for deductions on state-income taxes and property deductions. There are some other new limitations for some deductions that many people have relied heavily on in the past. So if you live in a high-tax state, and you are a moderate or high-income taxpayer, you will want to pay close attention.
- Mortgage interest, medical payments and charitable gifts that exceed 7.5% of your income can still be deducted if you choose to itemize your deductions. It will be harder to qualify to itemize your deductions due to the new tax changes. If you can qualify, you will get bigger benefits. Some of the new guidelines are: standard deduction for singles is 12k, 24k for married couples. There is a new state-income limit of 10k. New limits on local property tax deductions too.
- Unreimbursed business expenses, tax preparation, and deductions for investment expenses have been eliminated.
- The new law no longer limits the itemized deductions. The old one was reduced by 3% for every dollar earned over $313k.
- You may want to bunch several years worth of deductions into one year. On the years when you don’t bunch deductions together, you may want to just take the standard deduction. You may want to make charitable contributions on different years and double the amount vs. making the same amount every year. It is a way to up your overall standard deduction to make it more beneficial for the taxpayer. Also, if you give large charitable donations anyway, you will be able to offset up to 60% of your income, which is up from 50% of your income previously.
- Take advantage of the pass through deduction on 20%. You can use this deduction for income from partnerships, proprietorships, and other pass through entities. There are limits however and will kick in from $315k to $415k for couples and $157,500k and $207,500k for individuals. That is for service businesses like consulting, advisory practices, law or medical. For non-service businesses like construction companies or retail stores, the limits are above those income ranges. The idea is to manipulate the income below the thresholds. There are new depreciation rules that are both accelerated and expanded. They used to only apply to new equipment, but now used equipment can qualify and the full depreciation amount can be claimed in the year it was purchased rather than having to spread out over the life of the asset, like the old rules required. This could have a huge impact on the amount of income that will be taxed if companies shell out for new equipment before the end of the year.
- You are going to want to maximize your year-end tax withholding. You will want to make sure you have withheld either 90% of this year tax or 100% of last years tax. You can make up any shortfalls at the end of the year however, which is helpful. Do an analysis now and if you need to, up your withholdings for the last paychecks for this year. It will help you avoid a shortfall or penalty situation. You certainly don’t want to get stuck with any unfavorable surprises if you could have done something more, now to avoid it.
- Definitely take advantage of all stock market losses you’ve had to offset your gains. We’ve had a great bull-market, which means that a lot of people are sitting on a large amount of long-term gains. You can offset up to $3,000 in losses to offset your taxable income. So use your long-term losses against your long-term gains, and your short-term losses against your short-term gain. Lock in some losses and take advantage of the stock market’s recent volatility if you need to. Anything over $3,000 can be rolled over into future years.
- There are also “opportunity zones” that can offer a deferment of elimination of capital-gains taxes you invest either directly or through funds in these areas that are in need of revitalization. Many investment firms are looking at some of these opportunity zone investments. You can minimize or defer the taxes on gains, and then after holding the investment for 5 years the gains will be reduced with a 10% step-up in cost basis. If you hold it for 7 years the step up is 15% and if you hold it for 10 years then any gains accrued in the opportunity zone was totally shielded from tax. It’s a great way to go for some. This is a great trifecta. You get to revitalize an area and create social impact, you’ve got a good investment opportunity and you also get the tax benefit. You can take a fully 180 days to reinvest any gain after you sell a security or investment. So if you sell any here at the end of 2018, you can invest the gain next year. Just do your due diligence and make sure you are making good investment decisions. Don’t invest in something just for the tax benefit. Instead, make sure that the investment is sound, notwithstanding the tax benefit.
- SEP IRAs and regular IRAs offer a great alternative for reducing your taxes while contributing to your retirement. The limit for contribution to SEP IRAs is $54K and $5.5K for regular IRAs. You can even contribute to them at the same time to minimize your tax liability if you are a high income earner. Your tax savings come for example, for each $1 of income times the marginal tax bracket. So if you make $150K a year and you contribute to both SEP IRA and regular IRA for $54K and $5.5K and your marginal tax bracket is 25%, you may save up to $15K in taxes. The deadline for this contribution is April 15, 2019.
- Health Savings Accounts HSAs are another way to reduce your tax bill but you need be enrolled in a high deductible health insurance plan. The maximum contribution amount for 2018 is $6.9K for those enrolled on a health insurance family plan. You can only use this account for medical related expenses at any time. The deadline for this contribution is April 15, 2019.
Taking advantage of these options now while you still can will be a great way to minimize the amount you owe in taxes as much as possible. For future years, it makes sense to utilize some of these strategies as early in the year as possible so that you are as prepared as you can be. No one wants to pay more taxes than they absolutely have to- we know, we get it. These strategies will help you maneuver the tax game more effectively.
For more information on how to make your tax plan and reduce the payment of your taxes contact our consultants we are here to help you.
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