You've got less than two months to make moves to reduce your 2018 tax bill.
In an interview with Robert Powell, editor of TheStreet's Retirement Daily, Jeffrey Levine, CEO and founder of Blueprint Wealth Alliance and director of adviser education at Kitces.com, said there are at least three items to do today.
Check Your Tax Bill
"The very first thing people need to do is look at their tax bill and what they've paid in through this year, as opposed to last year," said Levine. "You want to make sure that you're withholding, or the estimated taxes that you've paid in before the end of the year are up to snuff."
You can do a paycheck checkup using the IRS's Withholding Calculator and, if necessary, complete a new W-4 form. The calculator helps determine the right amount of withholding. According to Tax Reform Tax Tip 2018-143 https://go.usa.gov/xPxs5, the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, changed the way tax is calculated for most taxpayers, including retirees.
In addition to using the IRS's withholding calculator, you might consider talking to a CPA who could review your 2017 tax return and your projected 2018 income.
No matter whether you use the IRS website, a CPA or both, "check to make sure you've got the right amount of withholding or estimated taxes paid in, so that you don't have estimated tax penalties," said Levine."
Underpaying? There's a fix
And, if, for whatever reason you find you're short, there are two ways to fix it. Increase your estimated tax payments and/or increase withholding. "And if you have that second option, typically it's the better way to go," said Levine. The IRS would treat any estimated tax payment made now as being paid December 31.
"But if you go to your employer and you withhold a larger portion of your last paycheck, or if you take a distribution from your individual retirement account, and you will hold the significant portion of that, for instance," he said. "Those withholdings are treated as if they were paid in equally throughout the year. So it's a little bit better protection mechanism for estimated tax penalty."
In addition, Levine recommends checking your itemized deductions versus the new standard deduction.
The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the standard deduction to $12,000 for single taxpayers and $24,000 for those married filing jointly and personal exemptions were eliminated. "And with that doubling, it means many, many, many more people are going to be a filing using the standard deduction," he said. "So, there are some things that we should be concerned about there, or at least aware of."
"Are you giving to charity in a tax efficient way?" Levine asked. "A lot of people, they may not give to charity for the deduction, but they want some tax benefit. Or, if they're going to give, they might as well give it in the most tax efficient way possible."
According to Levine, there are a few of many options to consider:
- Bunching 2018 and 2019 charitable contributions to get over the itemized deduction threshold.
- Contribute to a donor-advised fund. "What that allows you to do is donate today, get the tax deduction up front, but from that donor-advised fund, then pay out those funds to the charities each year," he said.
- Instead of gifting by check, gifting appreciated stock even if you don't get the deduction.