2018 brought a lot of changes to the tax law for all tax payers. Whether you are a big business owner, a small business owner, or an individual filer, you experienced some changes. With these changes in consideration, it’s extra important for taxpayers to stay on top of their taxes as the year ends and April 15th draws closer and closer.
Here are some helpful tips to implement into your tax planning strategy, starting now. The sooner your taxes are in order, the easier tax season will be for you and your business, or you and your family.
Tax Tip #1: The Bunch Strategy.
One major change to the tax law this year was the standard deduction amount. Taxpayers can now claim a standard deduction double the amount it was in 2017, totaling up to $12,00 for single filers and $24,00 for those filing jointly. The advantage of taking the standard deduction when filing taxes is being able to file sooner and having a simpler tax return. However, taking the standard deduction means one can’t take advantage of other deductions such as charitable donations or state and local taxes.
If you can’t decide which route is best for you, consider the bunch strategy. This strategy involves “bunching” itemized deductions together in one year, and then taking the standard deduction the next year. For example, instead of making a charitable donation of $10,000 each year, bunch a few years together and donate $30,000 in one year. Doing so will reduce the amount of taxable income for that year. When done correctly, this strategy can save taxpayers thousands of dollars each year.
Tax Tip #2: Contribute to a Tax-Deferred Retirement Account or HSAs.
Taxpayers can receive tax savings when they make pre-tax contributions to a 401(k) or 403(b) account in 2018, as long as they make the contribution before December 31st. If you are younger than 50, you can contribute up to $18,500 in a 401(k). The amount raises to $24,500 if you are 50 or older, giving older individuals the chance to save more as their retirement draws closer. IRA accounts differ slightly. Individuals can contribute up to $5,500 each year if they are younger than 50, and up to $6,500 each year if they are 50 and older. Contributions to retirement accounts are increased after age 50, termed as “catch-up contributions.”
HSA accounts can be used as taxable income as well. What’s great about these accounts is they allows individuals to withdraw from the account completely tax-free.
Tax Tip #3: Distribute Wisely
Retirement accounts, such as a traditional IRA or 401(k) require individuals 70 ½ and older to take required minimum distributions (RMD). Once you turn 70 ½, taxpayers are responsible for making these distributions each year. If you fail to make your yearly distribution, you will be penalized, so you want to make sure you keep track of your RMDs.
Taxpayers are not limited to simply taking their RMD out of their account and pocketing the cash. Taxpayers can opt to use their RMD for charitable purposes by transferring the amount directly from their retirement account into the charity. While the rules surrounding this option are quite complex, it is a great option for those who execute it correctly, as the transferred amount does not contribute to your gross income or your charitable contribution deduction limit.
If you found these tips helpful but need further explanation don’t hesitate to reach out to us! We can help you save money on your taxes in 2019.