Certainly, you’ve heard the old adage, there is nothing certain in life except death and taxes. However, tax laws can be uncertain. They evolve and change, and taxpayers must stay flexible to make the most out of the situation. With the passage of the Tax Cuts and Jobs Act, many taxpayers will see changes to their tax situation. Now is the time to plan for those changes and embrace the opportunities. The Pennsylvania Institute of Certified Public Accountants (PICPA) provides five tax planning tips to explore today.
Consider adjusting your withholding and estimated tax payments (if you haven’t already) and making tax-saving deferrals.
No one likes surprises when it comes to their tax bill. With the many 2018 tax law changes, it’s important to revisit how you are withholding taxes from your paycheck. If you’re withholding too much, you’ll get a bigger refund at the end of the year when you file your taxes, but you could have had that money sooner. If you will owe more taxes this year, increasing your withholding or paying estimated tax payments can mitigate a large tax bill when you file your return. Plus, there are interest and penalties that you could be assessed if you don’t pay enough taxes throughout the year.
The IRS revised its 2018 withholding tables based on the new tax law, and taxpayers should consider updating their Form W-4, Employee’s Withholding Allowance Certificate, with their employer. The withholding calculator can help you determine the effect of the 2018 tax changes, though you may still need professional guidance. One PICPA member provided a step-by-step guide on using this calculator to accurately assess your tax situation.
Also, explore other tax-saving deferral opportunities provided by your employer, such as increasing the amount you are contributing to a 401(k) or into a health savings or flexible spending account. If self-employed, you may want to consider a simplified employee plan (SEP) IRA where contributions are made entirely by the business, or a solo 401(k) that offers both employee and employer contributions.
Consider “bunching” charitable contributions so you’re able to maximize tax benefits.
The standard deduction is now double what it used to be, and millions of taxpayers will no longer itemize their expenses. This means some taxpayers will no longer receive a tax benefit from the deductions they used to regularly claim. However, with some careful planning, you can still see benefits from charitable contributions. If you are a charitable person, consider bunching donations into one tax year so that you reap the tax benefits of those gifts.
For small-business owners, understand the new deduction for qualified business income (QBI).
There is a new deduction that allows owners of sole proprietorships, S corporations, and partnerships to deduct up to 20 percent of their business income. The intent of this new deduction is to help these businesses keep pace with the large tax cuts associated with C corporations (C corporations now pay a flat 21 percent tax rate, a big cut from the previous graduated rates of 15 percent, 25 percent, 34 percent, and 35 percent).
There are many complexities associated with this new deduction, including limitations, income phase-outs, and what is considered “income” for purposes of the deduction, to name a few. One PICPA member further explained these complexities in a blog after tax reform became law.
You may want to consult with your tax adviser to determine if there is anything related to the QBI deduction that you are not utilizing. The QBI deduction is complex, and there are some small but impactful changes a business can make to maximize the impact of that deduction.
Consider paying down your home mortgage and home equity loans.
Because of the increased standard deduction, some taxpayers will no longer receive a tax benefit from the mortgage interest paid on their home. Under the new rules, you can’t deduct interest paid on your home equity loan or line of credit if the money was used for purposes other than buying or improving your home. PICPA members addressed both the mortgage deduction and home equity loan deduction.
Now is a great time to look at your balance sheet. Review your assets and liabilities, pay attention to the interest rates you’re paying (net of any tax savings), and start paying off debt. Taxes are always a huge consideration, but overall financial stability and debt management should be your focus.
Talk to your CPA.
A certified public accountant (CPA) can help you navigate the constantly changing and complex tax laws. CPAs must comply with extensive education and experience requirements, making them the best tax professional for you to consult about these changes. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.