The 2018 tax season is going to bring some surprises to a lot of taxpayers – some good, some not so good.
We had a major change in the tax code late in 2017, known as the Tax Cut and Jobs Act, that changed the tax code as we knew it.
Though the media is buzzing with the many of the changes, many taxpayers won’t become fully aware of how sweeping they are until they file their 2018 tax returns this spring.
By then, it’ll be too late to do much about your 2018 income taxes. But to help you avoid tax issues when you file your return next year, here are the 13 best tax moves to start 2019. And trust me, you’ll want to get some of these in motion as soon in the year as you can.
1. Adjust Your 2019 Tax Withholding
2018 has seen the arrival of major changes in tax rates, the standard deduction, and personal exemptions.
For example, beginning in 2018, personal exemptions have been eliminated. However, the standard deduction has been increased from $6,350 for singles, and $12,700 for married couples filing jointly in 2017, to $12,200 for singles, and $24,400 for married couples filing jointly in 2019.
Meanwhile, marginal tax rates have all been lowered. For example, the 15% tax bracket has been replaced by 12%, and the 25% bracket by 22%.
You’ll need to adjust your payroll withholding to reflect those changes. Chances are your employer has already taken care of that. But if not, you should make changes as soon as you file your 2018 return. By then you’ll know if you’re withholding too much or too little. And if you are, you should make changes as early in the year as possible.
2. Increase Your 401(k) Contribution
For 2019, there’s been a $500 increase in the maximum employee contribution amount to 401(k) plans and other employer sponsored retirement plans. That raises the maximum contribution from $18,500 to $19,000 for 2019. The $6,000 catch up contribution for taxpayers 50 an older remains unchanged.
If you normally make the maximum contribution, you should adjust the amount as soon as possible, to spread the increased contribution over as many payrolls as possible.
3. Increase Your IRA Contribution
The $500 retirement plan increase also applies to IRA accounts. The IRA contribution maximum is increasing from $5,500 in 2018, to an even $6,000 for 2019. The $1,000 catch up contribution for taxpayers age 50 and over remains the same.
4. Consider Relocating to a Tax-Friendly State
If you’re not already aware, the new tax law has put a $10,000 deduction limit on state and local taxes (SALT) for 2018 and beyond. The limitation will have a serious impact on the tax situations of people who live in high tax states.
If you’re considering making a move in 2019, or if that option is available, you may want to consider relocating to a low tax state. For example, nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income tax. It may be a radical strategy, but if you’re planning on making a move, and you have control over where it is, lower tax states are the better choice under the new tax law.
5. Set Up an HSA
The higher standard deduction means it will be more difficult to write off medical expenses. But you may be able to work around that by establishing a Health Savings Account (HSA).
Under an HSA, you can make a tax deductible contribution up to $3,500 for a single person, or up to $7,000 for a family for 2019. There’s also a catch-up contribution of $1,000 if you’re 55 or older.
The advantage with an HSA is that you can make the tax-deductible contribution without needing to itemize your deductions.
6. Plan to Fully Use Your Flexible Spending Account (FSA)
FSAs are similar to HSAs, but they have much smaller contribution limits. There’s no change here under the new tax law, however, FSAs generally involve forfeiture of any unused benefits by year-end. Though there are some exceptions employers can provide, they’re limited in scope. The best option is to do all you can to fully use all funds contributed to the plan before the end of the year.
7. Buying a New Home? Watch the Price
The new tax law limits the mortgage interest deduction to interest paid on home loans not to exceed $750,000. If you’re planning to buy a home in 2019, and looking at the high end of the market, keep this mortgage limit in mind. It’s a substantial reduction from the $1 million home indebtedness permitted under the previous tax law. (NOTE: the deduction on higher home loan amounts taken before 2018 are grandfathered in the new law.)
8. Starting a New Business? Discuss the Business Entity Type with a CPA
There have been major changes in the tax code businesses, depending upon the type of business entity you have. For example, the income tax on corporations has fallen from 35% 21%.
But there’s also a qualified business income deduction that allow small businesses to deduct up to 20% of their qualified business income. The deduction applies to S corporations, LLCs, partnerships, and those who file Schedule C. It also phases out with incomes between $157,500 and $207,500 for singles, and between $315,000 and $415,000 for married filing jointly.
Both provisions represent significant reductions in tax for small businesses. But if you’re forming a new business, or considering a new entity classification for an existing one, you should sit down with a CPA to determine which is the most advantageous under the new tax law.
9. Be Ready to Make Estimated Tax Payments on Extra Income
The changes in tax rates, standard and itemized deductions, the elimination of personal exemptions, and other tax changes, can have a major effect on your tax liability. Just as you need to adjust your withholding tax accordingly, you’ll need to do the same with estimated tax payments on any income you earn that isn’t subject to withholding.
This can include business income, investment income, or Social Security, just to name a few sources. You may need to set up estimated tax payments directly with the IRS or through your bank to allow for a potentially higher tax liability.
10. If You’re Thinking of Making a Roth IRA Conversion Now is the Time to Set it Up
This is another item that’s not specific to recent tax changes. But if you’re planning to do a Roth IRA conversion in the new year, it’s best to begin planning it out as early in the year as possible.
A Roth IRA conversion is where you convert tax deferred retirement plans, like 401(k) plans and IRAs, to Roth accounts, where they ultimately provide tax-free income in retirement.
The main drawback to a Roth IRA conversion is that you must pay tax (but not the early withdrawal penalty) on any funds converted to a Roth from other retirement plans in the year of the conversion. This can produce a substantial tax liability, particularly if you’re in a high tax bracket, and the amount of the conversion is large.
Since that tax liability generally must be paid out of non-retirement funds (so the full amount of the conversion can be included), you’ll want to set up estimates as early as possible to avoid penalties and interest.
11. Take Advantage of Expanded Opportunities with 529 Plans
There’s good news here under the new tax law. Under the previous law, funds from 529 savings plans could only be used to pay college level costs. But beginning in 2018, the plan has been expanded to allow the use of up to $10,000 in 529 plan funds to pay for tuition in grades K through 12.
This will be an obvious benefit if you have one or more children in private schools, or are considering making the move in 2019. What’s more, the $10,000 limit is per account, so if you have two plans for your child, the limit is $20,000.
12. Get Your Employer to Switch to a Reimbursed Employee Business Expense Plan
A lot of taxpayers incur employee business expenses in connection with their jobs. This is particularly true of people who work in sales. Under the old tax law, you were able to deduct unreimbursed employee business expenses, to the extent they exceeded 2% of your adjusted gross income.
That provision is gone in the new tax law.
The work around is to ask your employer to switch to a reimbursed employee business expense system. That’s where you incur the expenses in connection with your job, and your employer reimburses you after the fact. In that way, expenses will be deductible to your employer, and the tax impact on you will be neutralized.
13. Prepare for Changes in the Alimony Rules
Under the old tax law, alimony was deductible for the payor, and taxable for the recipient. That’s still the case for the 2018 tax year, but it will change for 2019.
The new law will apply to divorce decrees issued after December 31, 2018. If you’re getting a divorce this year, and you’ll be paying alimony, you will no longer be able to count on a tax deduction. You’ll have to adjust your tax withholding or tax estimates accordingly.
There is one loophole in the change. For divorce decrees issue prior to January 1, 2019, alimony will continue to be deductible for the payor, and taxable to the recipient.
Final Thoughts on the Best Tax Moves to Start 2019
There have been major changes in the tax code since 2017. But since many taxpayers won’t be aware of exactly how extensive those changes are until they file their 2018 taxes, it’s important to get a jump on 2019 as early in the year as possible.
This will be especially important if any of the changes result in a higher tax liability. If you increase withholding, establish tax estimates, or implement tax strategies early in the year, you’ll minimize the impact of any potential negative outcomes.
2019 will be a year when advance tax planning will be more important than it has been in the past.