Tax breaks and year-end planning tips for individuals

Now that fall has arrived officially, it means that December is around the corner. Before the year ends it is the time to begin thinking about what you can do to minimize your tax liabilities or maximize your tax refund.

The Tax Cuts and Jobs Act of 2017 mean changes for both individual and corporate taxpayers. Although many individual taxpayers are expected to see a drop in their federal tax liability in 2018, that is not the case for everyone because limitations, or the elimination of certain deductions, might offset the benefit of slightly lower tax rates.

Tax planning and creating a tax strategy is as important as ever. When income is timed and deductions are planned, you will be in a better position once you start the task of completing your taxes for 2018. Next month, corporate tax planning will be discussed.

Know your tax bracket and your kids too

To plan properly, estimate where your income likely will end up for 2018. This information is the key to creating a strategy such as deciding to pay a medical bill this year or next year or even choosing a wedding date.

In addition to knowing your tax rate, it is important to know your child’s tax bracket. Prior to the tax law changes, children under 19 or full-time students under 24 were taxed at their own individual rates for earned income (wages), but unearned income (i.e., portfolio income) above a threshold ($2,100 in 2017) was effectively taxed at their parent’s marginal tax rate.

The new law changes this arrangement by subjecting children’s unearned income to trust tax brackets, which top out at 37 percent on income over $12,500. Even though high-income families paying the 37 percent federal rate are not affected, taxpayers in who pay lower tax rates might see a jump if their children’s portfolios produce more than $12,500 of unearned income.

Consider deferring income

W-2 employees usually are not in a situation to defer income. However, you might be able to defer a year-end bonus to the following year if this is standard practice in your company. Self-employed earners, freelancers, or consultants have more flexibility.

One way to defer income is to delay billing clients until late in the month of December when chances are less likely you will receive payment before the year closes.

However, keep in mind that it does not make sense to defer income if you expect to be in the same or a lower tax bracket in 2019. You could risk paying higher taxes in the next year if that income pushes you into the next income bracket.

Tax deductions and tax breaks

Determine if you’re better off taking the new standard deduction of $12,000/individual and $24,000/married filing jointly, both of which have increased from 2017. Some taxpayers are finding that taking the standard deduction saves them more money than itemizing. This is particularly true for anyone who does not have mortgage interest to claim. The deduction for a heads of household is $18,000.

If you are taking deductions, keep these points in mind.

A receipt is required as proof of any contribution of any amount, even small amounts. Previously, receipts were required to back up contributions of $250 or more.

You are allowed to pay early an estimated state income tax bill due January 15 or a property tax bill due early in the next year.

Under the new law, the deduction for medical expenses is changing in favor of the taxpayer. If you are considering elective surgery in 2018 you just might want to wait until 2019. Deductibility for medical is decreasing to 7.5 percent of adjusted gross income from 10 percent. For those who have high out of pocket medical expenses this new rule could save money.

Be careful how you execute the timing of speeding up deductions, especially if you are subject to Alternative Minimum Tax (AMT).

Contribute the maximum to retirement accounts

Making deductible contributions to qualified retirement accounts reduces your taxable income for the year. You have until April 15, 2019 to make IRA contributions for 2018.

Maximize your contributions to your 401(k), which is $18,000 for 2018 and $24,000 if you are 50 or older. At minimum you should contribute the amount that your employer will match.

An IRA contribution is another way to save on taxes while saving for your future. The rules allow you to contribute a maximum of $5,500 to an IRA for 2018, plus an extra $1,000 if you are 50 or older.

Paycheck deductions

If you are a W-2 employee, double check the number of deductions you are taking.

Are you withholding enough or too much from your paycheck? If you are not sure, it is time to recalculate this figure. Either discuss this calculation with your accountant or go to IRS.gov and search for the calculator to make this determination on your own.

Any adjustments will require you to submit a new W-4 form to your, whether you are claiming fewer or more deductions.

Remember that your investments or owning a house can affect deductions, because of capital gains. The new law preserves the tax treatment of capital gains and qualified dividends.

To learn more about how the new tax laws affect you, consult with your trusted tax professional.

The professionals at Steven Alpinieri CPA, An Accountancy Corporation, offer tax planning services, and both tax and audit engagements including audits, reviews and compilations. If you would like to learn more, please visit www.sandiegocpasteve.com or call the office at (858) 230-6610.