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Your postcard-sized income tax return is here, but that doesn’t mean you should tune-out on mid-year tax planning.
On Friday, the U.S. Treasury Department and the IRS announced new updates to the Form 1040, the individual income tax return filers use.
Though the form is now “postcard-sized,” filers will still need to pick through additional paperwork — known as schedules — in order to calculate their tax breaks, including the deductions for educator expenses and your health savings account contributions.
> “It’s going to take another envelope full of worksheets to get the form down to the size of a postcard,” said Tim Steffen, director of advanced planning at Robert W. Baird & Co.
“But the software is so good these days, most people can handle their taxes themselves,” he said. Indeed, of the 141.5 million returns the IRS had received as of May 11, about 126 million came in via e-file.
Shrunken 1040 aside, it’s time to get cracking on your mid-year tax planning and make sure you’re on track to head off a tax bill from Uncle Sam next spring.
Here’s what you should review with your accountant in light of the changes stemming from the Tax Cuts and Jobs Act.
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Under the new law, the IRS overhauled the tax withholding tables, which employers use — along with Form W-4 — to determine how much income tax ought to be withheld from your paycheck based on the number of allowances you claim and how much you earn.
If you haven’t had a chance to review your withholding since the new tables came out in February, be sure to do it now.
If you withhold too much, you get a refund next April. But if you’re short, you’ll owe the IRS.
In previous years, it may have made sense for wage earners to withhold less under certain circumstances: For instance, if they itemized deductions.
That may no longer be the case, especially now that the standard deduction has roughly doubled to $12,000 for singles and $24,000 for married-filing-jointly.
“It’s the worst surprise if you’re under-withheld,” said certified financial planner Debbie J. Freeman, CPA and director of financial planning at Peak Financial Advisors. “I’ve been encouraging a withholding review, especially if you’re an employee in a dual income household.”
Start here with the IRS’s withholding calculator.
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The new tax code increased the standard deduction, but curbed many itemized deductions.
Those changes include a $10,000 cap on the amount of state and local taxes you can claim, and the outright elimination of miscellaneous itemized deductions, like unreimbursed employee expenses and investment fees.
Review your Schedule A, which lists itemized deductions, and strategize with your accountant.
For instance, now might be the time to fight back on high property taxes.
“We are encouraging people to examine their property assessments,” Freeman said. “Don’t be afraid to challenge it and try to get it reduced as much as you can.”
Further, since fewer people will be itemizing, look for tax efficient ways to pay for things. One way would be to use your health savings account to pay for long-term care insurance premiums if your balance is large enough to handle the expense, Freeman explained.
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Here’s another idea: Revisit your investment fees now that you can’t deduct them.
Prior to the Tax Cuts and Jobs Act, you were allowed to deduct investment and custodial fees, trust administration fees and other expenses for managing investments that produce taxable income. Under the old law, you could claim this and other miscellaneous itemized deductions to the extent they exceeded 2 percent of your adjusted gross income.
Though you couldn't take a deduction for traditional IRA fees that you paid directly from the account, under the old law you were able to use other assets to pay those expenses and then take the deduction.
Now, you should think twice: If your IRA is growing rapidly and you have a long time horizon, consider using outside money to pay the fees, said Jeffrey Levine, a CFP/CPA and CEO and director of financial planning at BluePrint Wealth Alliance.
This way, more of your IRA cash continues growing on a tax-deferred basis.
If your time horizon is shorter and you're in conservative investments, it may make sense to deduct the fee directly from the IRA instead.
You can use taxable account dollars to pay your Roth IRA’s costs. This way, you leave your Roth IRA — a pot of tax-free retirement savings — to continue growing.
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If you’re charitably inclined but just short of surpassing the standard deduction, consider making two years’ worth of donations in 2018 to get over the hurdle so that you can itemize.
This is known as “bunching” charitable deductions.
“My suggestion is to do zero or close to zero giving in one year and take the standard deduction,” said Jeff Fosselman, CPA and senior wealth advisor at Relative Value Partners in Northbrook, Illinois.
“The following year, load all of your charitable giving for two years into one,” he said.
If you’re over 70½ and taking required minimum distributions from a traditional IRA, consider transferring that money directly to a qualifying charity.
This move, known as the qualified charitable distribution, allows you to meet your RMDs and your charitable goals at the same time — and you won’t incur income taxes on the distribution.
“If you don’t get a tax deduction for the gift, you may as well do the qualified charitable distribution and not have to report it as income,” said Steffen.
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