Your 2017 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to prepare for the big changes that will occur in 2018 and beyond. The sooner you get started, the sooner you can start planning that summer vacation!
Keep Better Tax Records: Was this tax preparation season a little more painful than it had to be? Channel your inner neat freak and get a jump on next year by creating a real or electronic file called “Taxes 2018”. Create a checklist of all required documents and throughout the year, put all relevant receipts, statements, W-2s, 1099s, property tax bills and mortgage interest statements in there. Also, keep track of your purchase price, commission, and sales price for any investment transactions. You’ll thank yourself in April 2019.
Avoid a Big Tax Refund: What’s not to like about free money? A lot! A tax refund is really just the return of a year-long, interest-free loan that you extended to Uncle Sam. You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund, or maybe paying down outstanding debt or replenishing your emergency reserve fund. If you received a refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax payments accordingly.
Check Your Withholding: The government estimates that most taxpayers will see a drop in their tax bill when 2019 rolls around, but because the new law has many twists and turns (especially for those who live in high property and income tax states), your best bet is to assume that your tax liability will be at least the same as this year. To avoid a penalty, you can pay 100 percent of your income tax liability from 2017 or 110 percent if you earn more than $150,000. To get a better sense of your situation, be sure to check out the revised IRS withholding tax calculator on IRS.gov. After doing so, you may want to adjust your W-4 at work so that you don’t have to write a big check next April.
Be Careful about Home Mortgage Interest: As of December 14, 2017, the new tax law mandates that you can only deduct interest for new home loans up to $750,000 (the previous limit was $1 million). It also limits the interest deduction on home equity loans. It’s now only permitted to deduct if you are using the loan to “buy, build or substantially improve” your dwelling. So, if you were planning to use a home equity line of credit (HELOC) to pay down higher interest auto, boat or student loans, you’ll need a Plan B.
Be Smart about Charitable Gifts: The new tax rule nearly doubles the standard deduction to $12,000 for single filers and $24,000 for those who are married and file jointly. That means those who were previously were itemizing and therefore entitled to deduct charitable contributions, may no longer get Uncle Sam’s help for their cause. One way to legitimately sidestep the rule is to bunch the charitable gifts you would have given over multiple years into one year. This way, you can itemize and then be entitled to the deduction. You can also consider a donor-advised fund, offered by most of the big investment firms. This vehicle allows you to put money or highly appreciated securities into the account, take the deduction in the year that you do so, but then gift the money or investments to your favorite charity whenever you want.
Don’t Pay for High School with a 529 Plan Yet: Yes, the new law expanded the use of 529 savings plans for K-12 private school expenses, but some states are not on board. Instead, they are still treating any non-college withdrawal as a non-qualified distribution and could charge you penalties.
Be Careful with Roth Conversions: If your tax bracket is dropping, this year could be an excellent time to convert your traditional IRA into a Roth, according to Ed Slott, CPA and IRA expert. “I like the Roth, because it removes the uncertainty of what your future tax bill might be.” But Slott cautions that the previous recharacterization rules, which gave investors a legal loophole to undo the conversion, have been repealed. You should carefully consider the tax consequences of the conversion and maybe even wait until the fourth quarter when you know exactly what your 2018 earnings will look like.
Schedule your Knee Replacement for 2018: If you itemize, the new law allows you to deduct qualified medical and dental expenses that exceed 7.5 percent of your adjusted gross income (AGI) – that’s a lower threshold than the previous 10 percent (the level returns to 10 percent beginning January 1, 2019.) Medical care expenses are a large category and you should check out this IRS list with tax information on payments of fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners. You should also check any insurance premiums you paid for policies that cover medical care or for a qualified long-term care insurance policy, and travel costs to visit a specialist. One thing NOT included: Elective cosmetic procedures… you’ll have to pay for the eye-job out of pocket!
Preview your 2018 Taxes: After tax season, check in with your accountant or financial pro and ask him or her to create mock 2018 returns. Michael Goodman, CFP® said that many of his clients who feared the worst about their new tax situation were pleasantly surprised to find that it was not as bad as they expected. He advises, “don’t make any assumptions – it may be just fine. If it’s not, better to know now so you can put a plan in place.”
A CFP® professional can help you evaluate the outcome of your 2017 tax filing, use these insights to adequately prepare for 2018 and help you understand how changes to tax laws can impact you moving forward.