The filing deadline is April 15, but it’s not too late for some savvy strategic moves
With the April 15 deadline for filing your 2018 Form 1040 only a few days away, it’s still not too late to make some moves that will save taxes on last year’s individual federal income tax return. And maybe on your 2018 state return too.
Here are five tax-saving ideas that can potentially be implemented with 2018 returns:
1. Choose to deduct state and local sales taxes
If you live in a jurisdiction with low or no personal income tax or if you owe little or nothing to the state and local income tax collectors, you have options. You can potentially claim itemized deductions on last year’s return for either (1) state and local general sales taxes or (2) state and local income taxes. But not both.
However, this option only applies if you have enough itemized deductions to exceed your allowable standard deduction for 2018 (generally $24,000 for married joint-filing couples, $12,000 for singles and those who use married filing separate status, and $18,000 for heads of households).
The other X factor: under the Tax Cuts and Jobs Act (TCJA), you cannot deduct more than $10,000 for all categories of state and local taxes combined or $5,000 if you used married filing separate status.
If you would benefit from choosing the sales tax option, you can use an IRS-provided table (based on your income, family size, and state of residence) to figure your allowable sales tax deduction. But if you hoarded receipts from your 2018 purchases, you can add up the actual sales tax amounts and deduct the total (subject to the overall $10,000/$5,000 limitation) if that gives you a bigger write-off.
Even if you use the IRS table, you can add on actual sales tax amounts from major purchases like motor vehicles (including motorcycles, off-road vehicles, and RVs), boats, aircraft, and home improvements. In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table.
2. Make deductible IRA contribution
If you’ve not yet made a deductible traditional IRA contribution for your 2018 tax year, you can do so between now and April 15 and claim the resulting write-off on your 2018 return, assuming you qualify. If so, you can potentially make a deductible contribution of up to $5,500 or up to $6,500 if you were age 50 or older as of Dec. 31, 2018. Ditto for your spouse if you are married.
There’s a catch: you must have enough 2018 earned income (from jobs, self-employment, or taxable alimony received) to equal or exceed your IRA contribution(s) for the 2018 tax year. If you are married, either you or your spouse (or both) can provide the necessary earned income.
The other catch: deductible IRA contributions are phased out (reduced or eliminated) if last year’s income was too high and you and/or your spouse participated in a tax-favored retirement plan last year. (See No. 5.)
3. Make deductible Health Savings Account (HSA) contribution
If you had qualifying high-deductible health insurance coverage last year, you can make a deductible HSA contribution of up to $3,450 for self-only coverage or up to $6,900 for family coverage. I covered this possibility in an earlier column.
4. Add up health insurance premiums and medical expenses
If you are an itemizer for 2018, you can potentially claim an itemized deduction for qualifying medical expenses, including premiums for private health insurance coverage and premiums for Medicare health insurance. Specifically, you can claim an itemized medical expense deduction for 2018 to the extent your total qualifying expenses exceed 7.5% of your adjusted gross income (AGI) for the year.
(For 2019, the deduction threshold is scheduled to rise to a daunting 10% of AGI unless Congress extends the 7.5%-of-AGI deal.)
Since the TCJA greatly increased the standard deduction amounts for 2018 to 2025, fewer individuals will be itemizing on their 2018 returns. But having significant medical expenses may allow you to itemize and collect some tax savings.
(For 2018, the standard deduction amounts are generally $12,000 for single filers and those who use married filing separate status, $24,000 for married joint-filing couples, and $18,000 for heads of households.)
Key point: If you are self-employed or an S corporation shareholder-employee, you can probably claim an above-the-line deduction for your health insurance premiums, including Medicare premiums. And you don’t need to itemize to get the tax-saving benefit. Ask your tax adviser for details.
I hope you can use at least one of these ideas on your yet-to-be-filed 2018 return. If so, and if you are pressed for time, you can always extend your return to Oct. 15, 2019 by filing IRS Form 4868. You can print it out from the IRS website.
5. More tips for deductible IRA contributions
• You and/or your married spouse must have 2018 earned income at least equal to what you contribute for the 2018 tax year.
• If you turned 70½ last year, you cannot make an IRA contribution.
• If you are unmarried and in 2018 participated in a tax-favored retirement plan (an employer-sponsored plan or a self-employed plan like a SEP or SIMPLE-IRA), your eligibility to make a deductible IRA contribution for last year is phased out between adjusted gross income (AGI) of $63,000 and $73,000. AGI includes all taxable income items and selected deductions such as the ones for self-employed health insurance premiums, HSA contributions, and alimony paid.
Key Point: For 2019 and beyond, only alimony payments required by pre-2019 divorce agreements can be deducted, but this change does not affect alimony payments made in 2018.
• If you are married and both you and your spouse participated in retirement plans in 2018, your eligibility to make a deductible contribution for last year is phased out between joint AGI of $101,000 and $121,000. Ditto for your spouse’s ability to make a deductible contribution.
• If you are married and only one spouse participated in a plan in 2018, the participating spouse’s eligibility to make a deductible contribution for last year is phased out between joint AGI of $101,000 and $121,000. The non-participating spouse’s eligibility is phased out between joint AGI of $189,000 and $199,000.
• If you are unmarried and did not participate in a plan last year, your AGI is not an issue. You can make a fully deductible contribution, assuming you have enough earned income to cover it.
• If you are married and neither you nor your spouse participated in a plan last year, you can both make fully deductible contributions, assuming you have enough earned income to cover them.
Source: Market Watch; Author: Bill Bischoff