Thursday, February 15, 2018

Tax Season Action Steps

Tax season is the time to, not only file your tax return, but to take action to do income tax planning. Below are three recommendations to consider:
Revisit Your W-4 Form- Taxpayers should complete a new W-4 form for tax withholding at their place of employment when life changes in a way that affects their income taxes (e.g., marriage or the birth of a child). In addition, withholding may need to change as a result of the Tax Cuts and Jobs Act (TCJA). The standard deduction has increased to $12,000 for singles and $24,000 for couples and itemized deductions for state income taxes and local property taxes (i.e., so-called SALT deductions) are capped at $10,000. As a result, fewer taxpayers will be able itemize deductions for mortgage interest and charitable contributions in the future.

Know Your New Tax Bracket- The tax savings for itemized deductions (if they exceed the standard deduction) is based on a taxpayer’s marginal tax rate, i.e., the rate paid on the highest dollar of earnings. There are seven different tax rates in 2018 as a result of the TCJA: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The higher the marginal tax rate, the more a taxpayer benefits from tax-deductible expenses.

Take Advantage of Investment Tax Breaks- Examples include Roth and Traditional IRAs for all workers with earned income and SEP accounts for those with self-employment income. Other tax-advantaged strategies are holding investments in taxable accounts for more than a year to qualify for long-term capital gains tax rates and purchasing tax-deferred annuities (note: select only annuities with low expenses).

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