Even though April 15th isn’t here just yet, many of us have already done the math and know how much we’re going to owe Uncle Sam or get back as a refund for the 2018 tax year. Granted, it may not have been smooth sailing to get to this point — millions of Americans were confused by changes to the tax law that went into effect this year, and many have seen an increase in how much they owe, according to George Dimov, CPA and Managing Partner at New York Accountant and Consulting Services. One of the main reasons folks are owing more is the new $10,000 cap on the SALT deduction — state and local taxes. “We have business owners who used to deduct $40,000 to $45,000 who can’t do that now,” Dimov says.
While there’s nothing you can do about the new tax law itself (or your high property taxes, unless you’re prepared to move to a lower tax city or state), there are some important things you can do now to prepare for the 2019 tax season. Here’s a look at three small adjustments that may have a big impact this time next year.
Adjust your withholding
If you owed money this year, adjusting your withholding as soon as possible is one of the best things you can do to ensure you don’t end up in the red again, says Anil Melwani, president of 212 Tax and Accounting Services in New York. If you’re trying to prevent owing money, then when you adjust your withholding, you’ll elect to pay more in taxes throughout the year. Yes, this means you’ll notice a discrepancy in your paycheck (i.e. it may look like you’re making less money) but you’ll simultaneously minimize the threat of getting a big bill as you head toward April 15, 2020.
Bump up your retirement contributions
One of the best ways to ensure you pay less in taxes is to increase your tax-deductible retirement contributions, Dimov says. Whether you put money into a traditional IRA (not a Roth – those contributions are made with money on which you’ve already paid taxes), an employer-sponsored 401(k) or one of the many accounts set up specifically for the self-employed, you’re reducing your taxable income for the year and ensuring you’re able to keep more of what you earn. Melwani suggests contributing the maximum amount you can afford — “That’s probably the biggest way you can make a difference,” he explains. (And note: It’s not too late to contribute to a traditional IRA for 2018!)
The new standard deduction of $12,000 for singles, $18,000 for heads of household, and $24,000 for couples married filing jointly means itemizing makes less sense for more people. Your cumulative deductions have to be greater than that to itemize – which is a shame as itemizing has historically helped tax filers save. But you’re not necessarily out of luck. Consider bunching or trying to lump your deductions into every other year. It will take a little work to coordinate timing of things like charitable contributions and elective medical procedures, but it can help you save significantly.
With Megi Meskhi