By: Brittany Komorowski, CFP ®, EA
As the 2018 tax season wraps up, you may find yourself either pleasantly surprised or possibly mortified with your tax situation. In 2018, the Internal Revenue Service passed the largest tax law change since 1986. It was estimated to help the majority of tax filers, however, what happened to the remainder of people left them far from pleased. I will go over a brief summary of the changes and a few helpful hints to make the 2019 filing season as sweet as pie.
The most commonly publicized change was the increase in the standard deduction. This greatly helped filers who were already taking the standard deduction or those whose itemized deductions totaled less than the new higher standard. You still itemized if the total of your medical, state tax, mortgage interest, and charitable donations were above the standard deduction amount.
However, there were quite a few changes to what you are allowed to itemize. The state and local tax section is now capped to a maximum deduction of $10,000. This change hurt tax filers living in high tax states or filers with high property tax bills. They also completely removed the 2% miscellaneous itemized deduction section which previously allowed you to deduct tax preparer fees, investment management fees, and unreimbursed employee expenses. If you were still able to itemize in 2018, it is likely the changes caused the total of your deductions to be lower than in the past which may have resulted in higher taxable income.
Large families were especially affected by a few of the changes. The IRS removed the personal exemption, a $4,050 deduction everyone received in the past for each member of the household! However, do not fret, if you have children, they increased child tax credit to $2,000 and also added a new dependent credit of $500 for dependents claimed over the age of 17. (A credit is often better than a deduction!)
Another widely stated fact was the tax rates decreased. What wasn’t discussed was the mandatory withholding changes that took place as well. You may have noticed your paycheck got a little bigger beginning early in 2019. This was because they reduced the amount you paid in for taxes because of the tax rate change. Many workers were surprised with the results of their return because they did not pay the same amount into taxes as the previous year!
Note: The IRS made significant changes this year and I highlighted just a few notable ones. I recommend discussing your specific situation with your tax preparer.
Now that you know a few of the changes, here are a few planning tips for 2019 to consider:
- Itemized Versus Standard: Review if you are itemizing or if you will be taking the standard deduction of $24,400 married filing joint or $12,200 single (plus additional if you are age 65 plus or blind). If your deductions were not enough to itemize for Federal, you could still have received an itemized deduction credit for Wisconsin. Review line 20 of your 2018 Wisconsin return to see if this did apply to you. If so, continue to track your deductions! You should also continue to pay your home property tax once per year to ensure you receive the Wisconsin property tax credit!
- Qualified Charitable Distributions (QCD): If you are not itemizing your deductions and over age 70.5, processing a qualified charitable distribution from your IRA may make sense for charitable gifting. These donations are done directly from your IRA to the charity, and are tax free! The distributions also count towards your RMD (required minimum distribution). QCDs are a great way to benefit both you and your charitable inclinations.
- Withholding: If you received a large refund or owed a large sum in 2018, I highly recommend that you review your withholding from all sources. It is likely you will need to change your withholding percent for 2019. Note, if you are under withheld significantly for the year, the IRS may charge you an underpayment penalty.
- Roth Conversion: With the lower tax rates, it may be an opportune time to consider a Roth IRA conversion. A Roth conversion is when you move IRA money to a Roth IRA to grow tax free. You pay the taxes at the time of transfer at your lower rate. I recommend you discuss this possibility with your tax advisor. Note, once converted another tax law change means you can no longer reverse the conversion.
- Investment Management Fees: Now that you can no longer deduct investment management fees as an itemized deduction, it makes sense to review this with your advisor so fees are coming from the most advantageous accounts.
- Mortgage: With the higher standard deduction amount and depending on your situation, it may make sense to pay off your mortgage more quickly as there are dwindling tax benefits. It is also important to note: your home equity line of credit is only deductible if used to pay for home improvements.
The new tax laws may have caused significant changes to your tax situation however, you are now in a better place to prepare yourself for 2019. I hope these helpful hints provide some ideas to propel the discussion about your 2019 tax return, and maybe make a few changes!
Liberty Financial Group, Inc