By Bennett C. Whitlock III
As 2018 winds down, it’s time to think about if and how you may be able to reduce the taxes owed on your next tax return. New tax laws, which generally took effect on January 1 of this year, mean you may need to approach your tax strategy differently than you have in the past. Talk to your tax professional about whether the following five considerations apply to you:
Claiming the standard deduction or itemizing deductions
As in prior years, you have the option to either take the standard deduction (an amount set by law and adjusted for inflation) or itemize deductions. The new tax laws nearly doubled the standard deduction, which may make it more attractive for people to choose this option. For individuals, it is now $12,000 (up from $6,350 in 2017). For married couples filing jointly, it is $24,000 (up from $12,700 in 2017). Those age 65 or older or who are legally blind may claim an additional standard deduction of $1,300 to $1,600, depending on your filing status.
However, if your total available itemized deductions are nearing the amount of the standard deduction, you may want to take steps to qualify for additional or increased deductions. Donating to charity, making an additional house payment with mortgage interest or for medical expenses (subject to an AGI floor) are common itemized deductions. Incurring these expenses in this calendar year may allow you to reduce your taxable income by more than the standard deduction. Certain limitations and deductions may no longer be available to you, so review your situation with a tax advisor.
If you believe you’ll be closer to the threshold in 2019, you may want to delay deductible expenses until next year to the extent you are able to do so. Going forward, it might be beneficial to bunch deductible expenses in alternating years to utilize the itemized deduction option when you can.
Remember that if you claim the standard deduction on your federal return, you may still be able to itemize deductions on your state income tax return.
Converting a traditional IRA to a Roth IRA
You can convert a traditional IRA to a Roth IRA any time. However, it may be more attractive to do so in this lower tax environment, particularly if you think you’ll be taxed at the same or a higher rate in retirement. This is for two reasons.
First, you may avoid higher future taxes on the dollars earned in your Roth account. A Roth IRA is free from federal income taxes and the requirement to take a minimum distribution from the account after age 70 ½. This means you may be able to keep more of your hard-earned retirement dollars.
Second, converting triggers federal taxes because you would be withdrawing the money (which is considered taxable income) from the traditional IRA to put it into the Roth account. If you convert this year, you will pay the lower 2018 rates on this additional taxable income. This is a perk to taking action now, if converting to a Roth IRA is a strategy you’re considering.
Whether you are able to deduct state or local taxes
Under previous law, you were generally allowed to fully deduct your state and local income taxes (or state sales taxes, if elected) and property taxes from your income. Under the new law, the taxes are capped at $10,000. This limit may impact your decision to itemize deductions.
If you qualify for a deduction as a business owner
If you are a business owner in a sole proprietorship, partnership, LLC or S corporation, a new tax provision may apply to you. Twenty percent of your qualified business income may be deductible from your income. Certain limitations apply, including those based on your line of business and taxable income. The rules around this are complex, so contact a tax advisor for additional information.
Reducing your taxable income
Many of the strategies previously used to reduce taxable income are still applicable under the new laws. A few to consider are:
- Deferring revenue into next year, if you’re able to do so;
- Selling investments to generate capital losses that can help offset capital gains; and
- Increasing pre-tax contributions to workplace retirement plans to help boost savings while simultaneously reducing your current tax liability.
While it’s always a good idea to be thoughtful about your tax strategy, the new tax laws mean it’s important to prioritize reviewing your plan this year. Consult with a tax professional and financial advisor for guidance on the best financial strategy given your goals.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor and Managing Director with Whitlock Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, Inc. He offers fee-based financial planning and asset management strategies and has been in practice for 22 years. To contact him call 703.492.7732 or visit his website at whitlockwealth.com. 12848 Harbor Dr., Suite 101 Lake Ridge, VA 22192.
Ameriprise Financial Services, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.