As we head towards the end of the year, we’re fast approaching the deadline to implement your family’s tax strategies for 2019. The Tax Cut and Jobs Act (TCJA) completely overhauled the tax code, and if you’ve yet to take full advantage of the benefits offered by the new tax law, now is the time to do so.
To qualify for some TCJA tax benefits, you’ll need to act by December 31, so don’t wait to get started. The following 4 tips could save your family big money on your 2019 tax bill.
1. Rethink itemization
Under the new tax law, itemizing your deductions might no longer make sense. That’s because the TCJA increased the standard deduction up to $12,200 for individuals and $24,400 for married couples filing jointly. So, if you're filing a joint return, you need more than $24,400 in itemized deductions to make itemization worth it.
The law also places new limits on itemized deductions, including a $10,000 cap on property taxes, and the elimination of state and local income-tax deductions.
Given these changes, taking the standard deduction might be the best option, but other factors, such as your health expenses and charitable giving, could affect your decision, so consult with your CPA to make sure.
2. Maximize contributions to retirement accounts
By maximizing your contributions to tax-deferred retirement accounts like IRAs and 401(ks), you can not only save for retirement, but also reduce your taxable income for 2019.
In 2019, you can contribute up to $6,000 to an IRA and up to $19,000 to a 401(k) if you're under 50, and up to $7,000 to an IRA and $25,000 to a 401(k) for those 50 and older. If you can’t afford the maximum amount, try to contribute at least the amount matched by your employer, since that’s basically free money.
You have until December 31, 2019 to contribute to a 401(k) plan and until April 15, 2020, to contribute to an IRA for the 2019 tax year.
3. Defer your income if you'll make less next year
If you’re expecting to make significantly more income this year than in 2020, try to defer as much income into next year as possible. However, this strategy only makes sense if you’ll be in the same or a lower tax bracket next year.
This might mean asking your boss to delay paying a year-end bonus until after January 1, 2020, or if you’re self-employed, waiting to invoice some clients until the new year. And whether you’re an employee or self-employed, you can also defer income by taking capital gains in 2020 instead of in 2019.
On the other hand, if you think you’ll be in a higher tax bracket in 2020, you may want to do the opposite and accelerate income into 2019 to take advantage of a lower tax bracket. Contact us to find out what’s best for your situation.4. Save on the child tax credit
The child tax credit now offers up to $2,000 per qualifying dependent child. To qualify, your child must be 16 or younger at the end of 2019. The first $1,400 of the credit is refundable, so the credit could reduce your tax liability to zero, and you’d still receive a refund.The cut-off for the tax credit is $400,000 for married couples filing jointly, and $200,000 for everyone else.
Don’t miss out on 2019 tax savings
Implementing these—and other—year-end tax-saving strategies could save your family thousands of dollars on your 2019 tax bill. But if you don’t act soon, these opportunities may vanish for good, so meet with your CPA as soon as possible. If you need references for trusted advisors, just let me know.
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How Will the New Tax Law Affect Your Family?
President Trump signed the new Tax Cuts and Jobs Act bill into law on December 22, 2017, and the law includes a number of historic changes to the federal tax code. However, the vast majority of the most dramatic changes are aimed at business taxation, not individual taxpayers.
That said, there are several fairly significant changes to personal income tax laws, which I’ve highlighted below. But keep in mind, unlike the new business tax laws, which are permanent, nearly everything listed here for personal taxes sunsets after 2025 and will revert to the 2017 code in 2026 unless Congress extends the changes.
Higher standard deduction
The standard deduction increases to $24,000 for joint filers, $12,000 for single taxpayers, and $18,000 for heads of households, all adjusted for inflation. The law also eliminates nearly all personal exemptions, however, so those with dependents won’t see quite as much savings.
Note that if you’re a 1099 wage earner, regardless of how much you earn, you pay approximately 15% of your earnings toward payroll taxes, which would otherwise be covered by your employer and taken out of your paycheck. So even though the standard deduction has increased, if you’re a 1099/ independent contractor, you may still face a big tax bill if you’re not structured properly.
Changes to mortgage interest deduction
For existing mortgages the limit on deducting interest on up to $1 million of mortgage interest stays the same. Deductible mortgage interest for new mortgages taken on after December 15, 2017, however, is now capped at $750,000. Additionally, homeowners may no longer claim a deduction for existing and new interest on home equity loans.
Increased child tax credit
The child tax credit increases up to $2,000 per child, and the first $1,400 is refundable, meaning the credit could reduce your tax liability to zero, and you would still receive a tax refund. The cut off for the tax credit increases to $400,000 for married couples filing jointly.
Expanded estate tax exemption
The estate tax exemption increases to $11.2 million for individuals and $22.4 million for couples, indexed for inflation. The rate for those estates still subject to taxation remains at 40%. However, don’t let this increase lead you to believe you don’t need to handle your estate planning if your estate is less than $11 million. Estate planning is what keeps your family out of court and out of conflict; it’s not just about taxes. Very few people will be impacted by the estate tax, but everyone’s family is at risk for court and conflict.
Eliminated state and local income tax deductions
State and local income tax deductions are repealed. This means that you will pay your state and local income taxes from after-tax income. However, you’ll be able to deduct up to $10,000 for state and local property taxes paid.
Changes to medical expense deduction
Under the new law, taxpayers can deduct any medical expenses that exceed 7.5% of their adjusted gross income in 2017 and 2018. But this new deduction level sunsets on Jan. 1, 2019, when it will revert back to the previous level of 10%.
Whether the Tax Cuts and Jobs act results in tax cuts for your family or an increased tax bill is greatly dependent on how you’ve structured your financial affairs. Creating a team of trusted advisors works well for business owners, 1099 contractors and W2 wage earners. Working with a team that includes a financial planner, a CPA, and an estate planning attorney can create a flow for your wealth and protections to keep it growing and minimize impact to the capital.