Relieved that you won’t have to think about taxes for another year now that you’ve finally submitted your 2017 return or will soon? It’s best not to put taxes on the back burner yet. Instead, take advantage of being in tax mode to make a few moves that can help with next year’s return and improve your finances overall.
That’s nearly always a good idea, but it’s especially timely now, given major changes in the 2017 tax law that could impact what you owe for 2018 and new tools to help with the process.
1. Save Your Tax Refund for Retirement
Filing season presents a perfect opportunity to pad your nest egg in the home stretch toward retirement if you’re among the roughly three-quarters of taxpayers who typically get a tax refund.
Chances are, it will be a significant sum. Older taxpayers typically get more money back from the Internal Revenue Service (IRS) than the average $2,900 refund. In 2016, the typical refund for taxpayers ages 45 to 64 was around $4,300. That’s enough to fund about two-thirds of the maximum $6,500 Individual Retirement Account (IRA) contribution allowed this year for savers 50 and older, if you qualify.
You can contribute to a traditional IRA as long as you or your spouse have earned income equal to the amount you’re putting into the account and won’t turn 70 ½ in the calendar year — even if you save in a 401(k) or similar retirement plan at work. If you contribute to an employer-sponsored retirement plan, your IRA contribution won’t be deductible, but the earnings will still grow tax-deferred.
2. Simplify Your Freelance Life
More boomers and Gen Xers work in the gig economy than other generations, according to a recent T. Rowe Price study. That means they’re also more likely to have the tax hassles that go along with earning freelance income, such as the complicated calculations to figure out how much you owe Uncle Sam and the annoyance of paying quarterly estimated taxes.
3. Do a Paycheck Checkup
If you’re a salaried employee, you’ve probably noticed a little bump in your take-home pay since January, courtesy of last year’s tax law. The average paycheck has increased by 1 to 3% in 2018. You may see more tax liability for tax year 2018 if you itemized deductions for 2017 and you pay steep property taxes or live in a high income-tax state such as New York or California. That’s because the new law limits the value of those write-offs by capping the deduction for state and local income tax withholding, property and sales taxes at $10,000. In addition, because the new law nearly doubles the standard deduction to $24,000 for married couples filing jointly and $12,000 for singles, you may now have to take the standard deduction if your itemized deductions for deductible expenses like home mortgage interest, property taxes and state income tax withholding are not more than the new standard deduction amount.
So, unless the total value of your charitable contributions, local taxes, mortgage interest and other write-offs exceeds those sharply higher standard deduction limits, they will no longer help to lower your taxable income, which might mean you need to have more taxes withheld.
Other situations that increase the likelihood your withholding may be out of whack: if you’ll pay the alternative minimum tax, earn freelance income or have capital gains and dividend income in 2018.
If you do need to make an adjustment, fill out a new W-4 form with your employer. That’s at least one thing that hasn’t changed since last year and doesn’t require an app to figure out.
If you have any questions regarding your tax situation and would like to speak to one of our tax professionals, click here to reach us by phone or email.