Happy Tax Day!
Today is the deadline for filing your personal income tax return for 2018. If you need more time, make sure to file Form 4868 for an extension.
My Taxes: A Report
Even though I followed the process leading to the 2018 Tax Cut and Jobs Act with some interest, I really wasn’t sure what my taxes would look like until I finally sat down and punched the numbers into TurboTax
As it turns out, my effective tax rate this year was about the same as last year.
Here’s where tax reform helped me:
- Decrease in rates in each tax bracket
- No AMT this year (due to the increased exemption, limitation on SALT deductions and elimination of personal exemptions)
Here’s where tax reform hurt me:
- Limitation of SALT deductions at 10%
With the limitation on SALT deductions, itemizing vs. taking the standard deduction was essentially a wash this year.
8 Tax Planning Tips for 2019
Now that we’re almost a third of the way through 2019, it’s a good time to take stock of things and consider some tax planning for the rest of the year.
1. Adjust Your Withholding
If you are receiving a big refund for the 2018 tax year, congratulations! Now, consider reducing your withholding so that you receive more in each paycheck (and stop giving Uncle Sam an interest-free loan).
If you are like me and are writing a check to Uncle Sam for taxes owed for the 2018 tax year, consider increasing your withholding (at least to an amount where you won’t be paying an underpayment penalty or struggling to figure out how you’re going to cobble the funds together to make this payment).
- If you have RSUs or PSUs vesting in 2019, keep in mind that your employer will likely only be withholding the statutory minimum. If you don’t increase your withholding, you may find yourself owing a lot of tax this time next year.
- If you’re planning to exercise and sell ISOs through disqualifying dispositions in 2019, keep in mind that your employer may not withhold anything or that you may have to request your employer to withhold the statutory minimum.
- If you participate in an ESPP program and it’s looking like your company’s stock price is going to be a lot higher than your buy-in price, you may find yourself owing a lot of tax if you’re selling those shares.
2. Bunching Deductions
If you find yourself no longer itemizing or on the verge of no longer itemizing, one strategy for 2019 is to bunch several years’ worth of deductions into this year so that your total deductions allow you to itemize your deductions.
One way to do this is with charitable giving. If you were already planning to donate to charity over the next several years, one strategy is to group several years’ worth of giving by contributing a lump sum of that amount into a Donor-Advised Fund. You can contribute appreciated securities and cash, among other things, into your Donor Advised Fund. This is something that the Money Blawgger did for 2018, and I’ll be posting more about this in the future.
3. Increase your 401(k) (or 403(b) or TSP) contributions
If you’re not already contributing the maximum amount to your 401(k) ($19,000 for 2019; $26,000 if you’re 50 or over), you have the opportunity to defer some taxes by increasing your 401(k) contributions. If you aren’t already contributing enough to at least get your full employer match, strongly consider increasing your contributions to at least that much.
4. Make an IRA Contribution
If you meet the income thresholds for deductible IRA contributions (for 2019: if a single filer, $64,000 with a complete phase-out at $73,000; if married filing jointly, $103,000 with a complete phase-out at $121,000), consider contributing up to the maximum amount ($6,000 for 2019) and receive a deduction for that amount. If your income exceeds the limits for deductible IRA contributions, congratulations. I’ll be blogging about non-deductible IRA contributions and conversions to Roth IRAs in a future post.
5. Contribute to Your Health Savings Accounts
If you have a high deductible health plan and are not already contributing the maximum amount to your HSA, you have an opportunity to reduce your taxable income by increasing your HSA contributions. You may also be able to take advantage of your HSA and never every pay taxes on your HSA funds again. In addition to having your HSA funds sit in a default cash account, most HSA providers allow you to invest that money, and those assets grow tax-free (at the federal level and for most states). Money that you withdraw from your HSA account used for qualifying medical expenses is also tax-free. Lastly, for the super savers out there, the HSA account can be another vehicle to supercharge your retirement savings. More on this in a future post.
6. Deferred Compensation Plans
If your employer offers a deferred compensation plan and you are eligible, congratulations because that means you make a lot of money! However, make sure you do the due diligence to learn about your plan and see what your options are. The primary downside for all deferred compensation plans is that if your employer goes bankrupt, you become an unsecured creditor with respect to the money that is in your deferred compensation plan. This is risk that I personally would not be willing to bear. If your company is going bankrupt, not only are you worried about the funds in your deferred compensation plan, you’re also likely out of a job. However, your risk tolerance may be different (e.g. you work at a bank that’s too big to fail), and the benefits of being able to defer a significant amount of compensation to future years may outweigh the risk.
7. Flexible Spending Account
If you have an FSA, set up a Google or Outlook calendar notification to send you a reminder 2 months before the end of your plan year and make sure you plan to spend enough so that you have no more than $500 in your FSA by the end of the plan year. Don’t make the mistake I’ve made in the past of leaving and losing money set aside in your FSA.
8. Contribute to a 529 Account
If you live in state where contributions to 529 accounts are deductible for state income tax purposes, congratulations (boo California, Delaware, Hawaii, Kentucky, Maine, New Jersey and North Carolina). A 529 account is one of several tax-advantaged plans for saving for education expenses. If you plan to help your children or grandchildren pay for some or all of their college or graduate school, consider opening or contributing to a 529 account. Contributions to 529 plans are considered by the IRS to be gifts for tax purposes, which means you could contribute up to $15,000 in 2019 before you hit the annual gift tax exclusion amount. In fact, because these contributions follow the gift tax rules, you could actually contribute up to $75,000 to a 529 in 2019 by making a 5-year election (your gift is treated as if it was made over 5 years, so you won’t be able to do this again the following year).
Also, with the Tax Cuts and Jobs Act, there is now also the added benefit of being able to use 529 account funds for private K-12 school tuition.
