Now is the time to start tax planning for next year, because you have time to make changes that may be necessary to avoid a huge tax bill.
Eric Bronnenkant, head of tax at online financial adviser Betterment, joined me recently for my online discussion to answer questions about taxes ahead of the April 15 deadline. A number of people had questions about how to better position themselves for 2019.
Can I claim my siblings on my tax return, even though I don’t live with my mother, but I do contribute $400 a month toward the bills and expenses for them?
Tax reform eliminated the deduction for personal exemptions and replaced it with a mix of tax credits starting in 2018. There is a $2,000 child tax credit for someone under the age of 17 and a $500 credit for other relatives. The IRS has a broad definition of child, which does include a sibling. While there are many tests to determine qualification, a few key points include providing more than 50 percent of the individual’s support, and the person must have lived with you for more than half of the year.
Is there any way to reduce my liability now? And can I pay my surprisingly huge tax bill over time without paying interest or penalties?
There are few ways to impact a person’s tax return after the tax year has ended. The IRS permits Traditional IRA and Health Savings Account (HSA) contributions until April 15 of the following year. Self-employed individuals on extension can make Simplified Employee Pension (SEP) plan contributions up until Oct. 15 of the following year. The IRS allows for taxpayers who owe money to set up a payment plan, but interest still accrues over this period.
Are there any major changes in terms of allowable deductions for independent contractors or self-employed people as a result of the new tax law?
The biggest change for self-employed individuals starting in 2018 was the new 20 percent qualified business income (QBI) deduction. The QBI is in addition to the deduction for all other business expenses and is designed to encourage business activity. The QBI deduction for service-based activities starts getting reduced over $157,500 for single individuals and $315,000 for married couples filing a joint return.
I found out that my wife took zero allowances despite being married with two kids. I changed it to three instead so she would receive a larger paycheck. To counterbalance the increase, I upped our contributions to our respective 403(b) accounts. Is this a viable option?
A convenient way to determine how much withholding someone needs to deduct from his or her paycheck is by using the IRS withholding calculator. This allows individuals to project their income and factor in pre-tax retirement contributions. The calculator will provide a suggestion regarding how many allowances to claim on the Form W-4.
I am 70 this year and have been advised that I will have to take about $20,000 starting this year from my IRA. How can I reduce the taxes I will owe? Like give it all to my church first, or take the money and pay taxes on it and then give it to my church? Are there other ways to take the distribution and save me on my taxes?
For individuals 70 1/2 and older, they may be eligible for a qualified charitable distribution (QCD). This tax break allows the donor to take up to $100,000 from their IRA for charitable purpose and avoid income tax on the distribution without itemizing their deductions. The IRS requires the QCD be paid directly to the charity and is allowed to be counted toward any minimum distribution requirement for the year. For individuals who need to take a required distribution and do not need the money, the QCD is a tax-efficient strategy. If a retirement distribution is not required, it would be wise to compare the QCD to donating appreciated long-term assets to a charity from a non-retirement account.