Taxes are complicated, so talk to a tax professional before you file.
No matter the time of year, it’s a good idea to meet with your accountant to discuss tax-reducing deductions and strategies. With new tax rules having come into effect for the 2018 tax year, it will shed light on exactly how those rules affect you to ensure you pay the right amount and not a penny more. Ask these questions:
How does the Tax Cuts and Jobs Act (TCJA) impact me?
The biggest change for individuals is the elimination of unlimited state, local and real estate tax deductions. These popular deductions are now capped at $10,000. Fortunately, income tax rates in general have been reduced, which could help offset the cap. Your company may now be withholding less tax. If you owed money last year, your accountant can calculate the exact amount your employer should withhold.
How do I optimize charitable giving?
Donating to charity has tax benefits you may want to discuss, especially now that the amount you can deduct has increased from 50% of your adjustable gross income to 60%. You can also ask about donor-advised funds. Put money into the fund, receive a tax receipt, and dole those dollars out (usually the gains on the investment) to the charities of your choice over time.
Can I still claim medical deductions?
The only way to claim medical expenses is by itemizing your deductions, versus opting for a standard deduction. Until the TJCA was passed, many people opted to itemize. However, rule changes made standard deductions more favorable, which means fewer people are claiming medical expenses. If you have high medical expenses, it could still make sense to itemize. You can deduct medical expenses that exceed 10% of your adjusted gross income. For instance, if your income is $100,000 and your medical expenses are $11,000, you can receive a $1,000 deduction.
What retirement savings strategies can reduce my taxes?
Contributions to certain retirement savings accounts, such as an IRA or a 401(k), will reduce your taxable income in the year those investments are made. Talk to your accountant to make sure you’re taking advantage of these accounts properly. There are also strategies you can employ that go beyond maxing out an account. For instance, if one spouse is making enough to sustain the family and the other spouse generates income from a side business, the business-owning spouse could put their earnings into a solo 401(k) – a retirement plan for companies with no employees – and potentially pay no tax.
How is interest in a High-Yield Savings Account (HYSA) and a Certificate of Deposit (CD) taxed?
If you’ve earned more than $10 in interest in either a HYSA or a CD, you’ll have to pay tax on those gains. Since interest is considered income, what you owe will be based on your marginal tax rate. Only interest – and not savings – is taxed, so even if you do have a large balance, and even if the rate you receive is attractive, you shouldn’t receive a large tax bill. It’s important to note that while CDs generally come in one-to-five year terms, you will have to pay tax on the interest in the year that interest is earned, despite not receiving any funds from the CD until it matures.
These are a few of the important tax issues to explore in more detail. Meet with an accountant or tax expert sooner rather than later so you don’t have to rush right before the annual April deadline.
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