Tax Tip of the Month
Tax Tips After January 1, 2018
We are now a few months into 2018 and you probably have already heard about the new tax laws that will affect you when filing your 2018 tax returns in 2019.
The changes resulting from the Tax Cuts and Jobs Act will require you to take advantage of tax planning strategies to effectively reduce your taxable income. Even though it is already 2018, there are still a few money-saving options for you to consider to effectively defer income or accelerate deductions to make the tax-filing season cheaper for you.
Contribute to your retirement accounts
In the case you have not already contributed your retirement account for 2017, we recommend doing so by April 17, 2018. That is the deadline for contributions to both a traditional IRA and a Roth IRA.
- Note: Regarding Keogh or SEP plans, you get an extension to file until October 15, 2018. Therefore, you will have until then to place your 2017 contributions into those accounts. However, we recommend contribution to accounts as soon as possible; doing so will enable you to receive greater benefit of tax-free compounding.
Another reason we recommend making a deductible contribution is to help you lower your tax bill this year (2017 tax return). In addition, as mentioned above, your contributions will compound tax-deferred. This is an ideal, win-win tax planning strategy.
- If you put away $5,500 a year for 25 years in an investment with an average annual 8 percent return, your $137,500 in contributions will amount to over $434,000.
- The same investment in a taxable account would grow to only about $325,000 if you’re in the 25 percent federal tax bracket (even less if you live in a state with a hefty state income tax as well - i.e., California).
To qualify for the full annual IRA deduction in 2017, you must either:
- not be eligible to participate in a company retirement plan, or
- if you are eligible, you must have adjusted gross income of $62,000 or less for singles, or $99,000 or less for married couples filing jointly.
- If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $186,000.
For 2017, the maximum IRA contribution you can make is $5,500 (and $6,500 if you are age 50 or older by the end of the year). For self-employed taxpayers, the maximum annual addition to SEPs and Keoghs for 2017 is $54,000.
Although choosing to contribute to a Roth IRA instead of a traditional IRA will not cut your 2017 tax bill—Roth contributions are not deductible—it could be the better choice because all withdrawals from a Roth can be tax-free in retirement. This brings current and future tax rates into play, and unfortunately, nobody can precisely predict what future tax rates will be in the years you decide to make withdrawals from your IRA.
- Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $5,500 ($6,500 if you are age 50 or older by the end of 2017) to a Roth IRA, you must earn $118,000 or less a year if you are single or $186,000 if you’re married and file a joint return.
The amount you can save for contributing to your retirement plan will vary. If you are in the 20 percent tax bracket and make a deductible IRA contribution of $5,500, you will save $1,100 in taxes the first year. Over the years to come, future contributions will save you a large sum, depending on your contribution, income tax bracket, and the number of years you keep the money invested and compound interest working for you.
Be sure to make estimated tax payments
In the event you didn’t pay enough to the IRS during the year, you could have a hefty tax bill. Plus, the IRS will charge you substantial interest and penalties, too.
When does this happen? Withholding on your paycheck may not be accurate - you may have received much more on commissions than you previously estimated. The IRS rules state taxpayers must pay 100% of last year’s tax liability or 90% of this year’s tax; otherwise, you will owe an underpayment penalty.
- Note: If your adjusted gross income for 2016 was more than $150,000, you have to pay more than 110 percent of your 2016 tax liability to be protected from a 2017 underpayment penalty.
If you make an estimated payment by January 15, 2018, you can eliminate any penalty for your fourth quarter estimate, but you still will owe a penalty for previous quarters if you did not send in any estimated payments back then.
- However, keep in mind that if your income windfall arrived after August 31, 2017, you can file Form 2210: Underpayment of Estimated Tax to annualize your estimated tax liability, and potentially minimize these extra charges.
Summary: Do not pay too much (overpay) on your quarterly estimates. It is better for you to owe the government a little rather than to expect a refund. Remember, the IRS doesn’t give you a dime of interest when it borrows your money.
Itemize your tax deductions
It’s less-time consuming to take the standard deduction, but you may save a large chunk of money if you itemize - especially if you are self-employed, own a home or live in a high-tax state.
- It’s worth the bother when your qualified expenses add up to more than the 2017 standard deduction of $6,350 for singles and $12,700 for married couples filing jointly.
- Many itemized deductions are well known, such as those for mortgage interest, property tax, and charitable donations.
You may deduct the amount of medical expenses that exceed 7.5% percent of your adjusted gross income (AGI) for 2017 and 2018. Beginning Jan. 1, 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of your AGI.
File and pay on time!
If you can’t finish your return on time, make sure you file Form 4868 by April 17, 2018. Form 4868 gives you a six-month extension of the filing deadline until October 15, 2018. On the form, you need to make a reasonable estimate of your tax liability for 2017 and pay any balance due with your request.
Requesting an extension in a timely manner is especially important if you end up owing tax to the IRS. If you file and pay late, the IRS can slap you with a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent a month of the tax due. The maximum late filing penalty is 22.5 percent and the late-payment penalty tops out at 25 percent. By filing Form 4868, you will avoid these costly late-filing penalties.
Please do not hesitate to contact us at 559-226-2209 if you have any questions or concerns about preparing your 2017 tax return. In addition, if you would like to schedule an appointment, either call us or email us at firstname.lastname@example.org. Alternatively, you can schedule an appointment by submitting an online form through our website at www.rooscpa.com/contact-us/.
Hope you find this helpful and we look forward to serving you.
Any financial or tax information contained in this article is taken from a general view and should not be acted upon in your specific circumstances without further details and analysis of the situation or professional assistance from a CPA or tax return preparer.
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