It is hard to believe that we are already into August and summer will be a distant memory before you know it! Tax year 2018 will be very interesting when we prepare our income taxes next year, as we incorporate the new tax law, the Tax Cuts and Jobs Act of 2017 (TCJA).
If you haven’t researched how the new changes will impact you, there is still time to review and plan before the end of the year.
Check tax withholding/taxable income– While the tax brackets have been lowered, tax withholding from your paychecks was also reduced. It is important that you review your adjusted gross income (AGI) and taxable income this year, to avoid any surprises. If you find that you may owe more (most taxpayers will not), you can still update your W4 with your employer to have more federal income taxes withheld. If your income will be similar to last year, you should check your standard deduction/exemption amounts, as these have been changed.
The standard deduction doubles from $6,500 single/$13,000 joint, to $12,000 single/$24,000 joint. If you are 65 or older and/or legally blind you get to add either $1,300 per person if you are married, or $1,600 if you are single, to the basic amount. For a married couple who are both 65 or older, the standard deduction would be $26,500. The doubling of the standard deduction means that more taxpayers will use the standard deduction instead of itemizing.
Even with the changes in itemized deductions, charitable donations were kept intact. If you find that you can still itemize, donations are always a good way to reduce your taxable income.
Personal exemptions are eliminated, so the amount of $4,150 per person that was set for 2018 is no longer valid. However, for households that claimed exemptions for children, the expansion of the child tax credit should give many households an extra deduction.
Depending on your personal situation, the new standard deduction could be beneficial to your bottom line, even with the elimination of the personal exemptions.
The new law retains the Qualified Charitable Donation (QCD)– For taxpayers who are 70 ½ and older, you can make a QCD directly from your IRA. This donation will count as part of your minimum required distribution requirement, but will not be taxable. You can donate up to $100,000. If you make donations regardless, this feature will reduce your taxable income, which can possibly lower the taxability of your social security benefits, keep your Medicare premiums low, and possibly give you access to tax credits/deductions that were not available to you in the past.
Health Savings Account (HSA)–If you belong to a high-deductible health care plan, you may have, or should have a HSA. The new tax law kept these accounts as is, and they still remain one of the most tax-advantaged accounts you can own, because your contributions are tax deductible, your earnings grow tax-free, and you can withdraw funds for qualified medical expenses tax-free. For 2018, you can contribute up to $3,450 for a single filer and $6,900 for a family (2 or more). If you are 55 or older you can add an additional $1,000. Along with your workplace retirement plan contributions, this is another way to reduce your taxable income.
The main goal for this year is to estimate your tax liability to insure that you will not owe Uncle Sam too much when you file your return. If you have a tax professional complete your taxes, have them review your taxes for this upcoming year. If not, you can use a 2018 tax estimator. Turbo Tax has a free tool called TaxCaster that I found was relatively simple to use. The IRS also has a withholding calculator tool to estimate if you are still having enough withheld from your paycheck: Go to https://www.irs.gov/individuals/irs-withholding-calculator .