Get ready for tax season — and for another year of smart planning.
It was an unusually active year on the tax front in 2018 because dozens of new tax rules took effect that dramatically changed the way people get taxed on their income. Although investors have seen all year the impact of lower corporate tax rates in the stocks they follow, the beginning of 2019 will be the first chance that many taxpayers get to see just how large of an impact tax reform had on the amounts they have to pay to Uncle Sam.
As the new year begins and tax season approaches, there are several things you should keep in mind. Some of these tried-and-true techniques have been around for years, but some will work particularly well because of all the recent changes. Follow these tips and you’ll be in a better position to make the most of tax reform and save as much as you can on your returns.
1. Take a fresh look at your taxes
The most important thing to do as you prepare your 2018 tax return is to throw out all of your preconceptions about whether you qualify for a particular tax break. The rules have changed enough on some key provisions that if you simply ignore them out of habit, then you could miss out on a lucrative tax-saving opportunity.
One key example of this involves the child tax credit. Most of the news surrounding this credit centered on the fact that it doubled in size in 2018, to $2,000 per child. But what many people might not know is that the income limits that determine whether those with qualifying children can claim the credit have risen substantially:
|Filing Status||Old Law Income Threshold||New Law Income Threshold|
|Single, Head of Household, or Qualifying Widow(er)||$75,000||$200,000|
|Married Filing Jointly||$110,000||$400,000|
|Married Filing Separately||$55,000||$200,000|
That’ll dramatically expand the number of taxpayers who are eligible. If you regularly earned a six-figure salary, you might have written off ever getting to claim the credit — but it might suddenly be available to you for the very first time this year.
2. Watch your withholding
If it turns out that you get a much larger refund when you file your 2018 return than you received in previous years, that’s only partially good news. Ideally, you could have gotten more of that money over the course of the year in your paycheck rather than waiting for a refund.
Adjusting your withholding at the beginning of the year makes a lot of sense, and it’s especially important with recent tax law changes. By selecting the right choices, you can ensure that you have an appropriate amount of tax withheld, boosting the size of your paychecks and letting you enjoy more of your earnings sooner.
3. Check your deductions
The near-doubling of the standard deduction in 2018 will lead to a big reduction in the number of people who itemize their deductions on their returns. That, along with limitations on some key itemized deductions like the state and local tax deduction, could have implications for the amount of tax planning you have to do throughout the year.
In particular, even if you take the standard deduction this year, look and see how much in itemized deductions you would have had. If the amounts are close, then it’s worth taking the time to save records and keep up your accounting. But if you’re nowhere near having enough to warrant itemizing, then you might not even have to go to the trouble of paying much attention to your potential itemized deductions throughout the year.
4. Look at your state income tax closely
One thing that many taxpayers might not realize is that state taxes don’t always mirror what’s happening at the federal level. Many states have completely independent tax systems, and the big tax-reform changes federally might have no impact on state-level taxation. Even those states that do typically mirror federal tax law sometimes take a while to catch up.
Pay close attention as you prepare your 2018 state tax return to notice any differences between new federal law and what your state requires. That way, you won’t get surprised to see an old tax provision come back to life.
5. Save a little more — and be tax-smart about it
Finally, as the new year begins, it marks a chance to boost the amount you save toward long-term financial goals like retirement. By using IRAs, 401(k)s, and other tax-favored retirement accounts, you can put yourself in a healthier financial condition and save on taxes to boot.
Most retirement accounts have higher maximum contributions for 2019, so it’s a great opportunity to add a little more toward your savings. With incentives like employer matching, that can be the best move you’ll make all year.
Keep your taxes as low as they go
Tax reform offered great opportunities for taxpayers to cut their tax payments. By keeping these tips in mind, you’ll be in a better place to make the most of the new tax laws and produce the savings you’ve hoped to get.