For years it was assumed that tax planning was reserved for the wealthy. While wealthy individuals will see the most benefit from tax planning, with big changes looming for the 2018 tax year, even middle-income earners can reap the benefits of tax planning.
Basic tax planning starts with your AGI or Adjusted Gross Income. This is your total income after any adjustments or credits have been applied. Reducing your AGI is the number one goal of many tax planners, and the easiest way to do this is to contribute money to a 401(k) or other retirement plan. By the way, 401(k) contribution limits have increased for 2018, with those under 50 able to put away up to $18,500, while those over 50 can contribute up to $24,500. IRA contribution maximums have also increased, with a maximum of $5,500 in 2018, while those over 50 can contribute up to $6,500. Contributing to a qualified retirement plan is the easiest way to positively impact your AGI; reducing your taxable income while also building your nest egg for the future.
Another way to minimize your tax liability is to simply change your withholding exemptions on your W4 certificate. In fact, the IRS is recommending that taxpayers take advantage of the newly updated withholding calculator available on the IRS website to check if too much or too little tax is being withheld from your paycheck.
Those looking to minimize tax liability in 2018 may also want to consider paying off a home equity loan. While interest was deductible on all home equity loans prior to 2018, under the new tax law, if the loan was used to pay off other expenses, the interest will no longer be deductible. However, if the loan was used for home improvements, it’s likely still deductible, provided it falls under the mortgage principle threshold of $750,000.
Aside from lowering your AGI, another area that tax planning traditionally focused on was increasing itemized deductions. While the opportunity to itemize still exists, keep in mind that deductions for moving expenses, alimony (for divorces after December 31st of 2018), and losses from natural disasters that do not occur in federally designated disaster zones have been eliminated, while deductions for state and local taxes paid have been capped at $10,000.
However, the new tax law allows taxpayers to deduct medical expenses that exceed 7.5% of AGI, down from 10% in prior years. If you have a high-deductible health insurance plan, or typically incur significant medical expenses each year, now might be the time to consider using the medical expense deduction. In fact, if you typically have high medical expenses, or a high-deductible health insurance plan, this might be the year to consider opening a Health Savings Account that allows individuals to contribute up to $3,450 annually, while families can contribute up to $6,850.
With all the changes looming for 2018, you may want to contact a finance or tax expert to help guide you through the maze, as well as get you on track for potential tax savings.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.
*Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. -Distributions from traditional IRA’s 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.