Published by Taylor Financial Group
Everybody is interested in saving money on their tax bill, but not everyone knows how to go about it (particularly now that we have a New Tax Act). Saving money on your taxes can be achieved through a variety of creative tax planning strategies. It’s not too late to consider these tips to save more money on your taxes this year.
Be generous with your retirement plan contributions. If possible, contribute sooner and contribute more heavily to your retirement plans to grow your wealth over a longer period. The longer the funds are invested, the more they can grow, as time works in your favor. Consider the contribution limits for each plan and set a goal that is feasible for your budget. Contribution limits for 2018 for IRAs are $5,500 per year (and $6,500 per year for those age 50 and above). Now that we are nearing the end of the year, it is important to check your plan contributions. If you have not met the contribution limits don’t stress, you can still contact payroll to accelerate the amount you are contributing to meet your goal before the years’ end.
To diversify your taxable income in retirement, consider shifting some of your retirement plan contributions to a Roth 401(k). The money that comes out of a Roth 401(k) during retirement will be tax free, while a traditional 401(k) would be subject to your top tax bracket. Just remember that you will have to pay income taxes on the amount that is converted. The contribution limits for 2018 are $18,500 annually and an additional $6,000 per year for those age 50 and above, bringing their total to $24,500. The total contribution limit for both employee and employer contributions to 401(k) defined contribution plans have also increased to $55,000 (and $61,000 for those age 50 and above). By contributing to your retirement savings, you grow your nest egg and reduce your taxable income, ultimately reducing your tax burden.
TIP 2: Bunching works! Under the New Tax Act, the standard deduction has doubled to $12,000 for individuals and $24,000 for married couples filing jointly. This increased standard deduction amount is leaving only about 10% of taxpayers to itemize. However, it may still make more sense in certain circumstances to itemize.
For the charitable givers who itemize, consider “bunching” as an option, where you group your contributions into one year and then skip the next. You can also “bunch” medical expenses and state tax payments. By bunching your deductions, you may be able to leverage the standard deduction and take better advantage of the tax changes.
And don’t forget that tax credits play a major role in tax savings, reducing your taxable income dollar-for dollar, which is much better than a deduction. Some of the tax credits available include educational credits, adoption credits, child and dependent care credits, foreign tax credit, efficient home improvement credits and more. The child tax credit has increased up to $2,000 per qualifying child with $1,400 being refundable. The income phaseouts have also increased significantly to $400,000 for married filing jointly and $200,00 for individual taxpayers, thus more taxpayers will qualify. Overall, there is a good chance that you could reduce your tax liability with credits this year.
The New Tax Act has introduced many complex changes which can provide many great tax planning opportunities. There are a variety of tax saving opportunities available; it’s just a matter of finding what fits your circumstances. Consult with us and your CPA to see what tax reducing opportunities may work for you. We are here to help you find the tax strategy that works best for you.
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.
Limitations and Early Withdrawals: Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Retirement Plans: Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.