Deductions, credits, income deferral — from whatever direction you approach your tax planning, the choices you make have a bearing on many aspects of your financial life. In addition, the rules governing your planning choices change or are updated with regularity. Those facts mean that early planning, combined with the willingness to adapt to changing conditions, will help you reap the most savings. Here are ways to get your 2018 planning off to a good start.
Address this year’s portion of your multi-year analysis.
Your end-of-year planning may have included “bunching” expenses or income by pulling items into one taxable period or deferring them to the next. Itemized deductions and alternative minimum tax planning are two areas that lend themselves to this strategy. Now that a fresh tax year is underway, review and update your analysis and begin to incorporate next year into your plan.
Stay on top of Affordable Care Act requirements..
If you decided not to purchase required health insurance coverage for 2018, be aware the penalties are increasing and plan accordingly. For 2018, you’ll pay a per-person or an income-based fine, whichever is greater, for any month you don’t have coverage or don’t qualify for an exception. The per-person fine is $695 per adult ($347.50 per child under age 18), up to a maximum of $2,085. The income-based penalty is 2.5% of your household income. This penalty maxes out at the total yearly premium for the national average price of a Bronze plan that you purchase on the health insurance website.
Investigate your retirement saving options.
The standard advice of making sure you’re taking full advantage of allowable contributions and any amounts your employer matches holds true for 2018. You can contribute up to $18,000 to your 401(k) in 2018, plus another $6,000 if you’re age 50 or older. Those are the same numbers as 2018, so if you’re already having the full amount deducted from your paycheck, you may want to direct all or part of your 2018 raise into an IRA. Why? You can diversify your retirement holdings, save additional tax-deferred or tax-free money, and possibly enjoy a saver’s credit as well as a tax deduction.
Whether you choose a Roth or a traditional IRA, the maximum amount you can contribute during 2018 is $5,500 (plus $1,000 when you’re age 50 or older). Just remember that your traditional IRA contribution may not be fully deductible if you’re eligible to participate in your employer’s plan.
Here’s another option for retirement savings: A myRA (“my Retirement Account”). These accounts are essentially a Roth IRA invested in a government security. You get no current deduction, but your investment earns interest and is guaranteed by the Treasury Department. You can fund a myRA with an automatic payroll deposit through your employer, withdrawals from your savings or checking account, or part or all of your 2018 federal income tax refund.
Educate yourself on education savings accounts.
Do you have kids in college? As you begin your income tax planning, schedule the timing and amount of distributions from your education savings accounts during 2018. Your goal: to make sure the withdrawals to pay qualified tuition expenses remain tax-free. To begin, total the amount you’ll receive from student aid, grants, tuition discounts, and education reimbursement accounts from your employer. Costs for expenses already covered by these programs and others reduce the amount that can come tax-free from your 529 account. You’ll also want to learn about a recent change to rules, affecting a federal financial aid form. Starting with the 2017-2018 school year, the form will use income data from an earlier tax year than is used under the present rules. This shift means some financial gifts — such as distributions from grandparent-owned 529 plans — may be made earlier.
Invest in planning for the 3.8% net investment income tax.
This surtax applies to the lower of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 when you’re single or $250,000 when you file jointly. Net investment income includes capital gains, interest, royalties, dividends, and passive income. Other items, such as distributions from IRAs and qualified plans and active business income, are excluded. The excluded items may still increase your modified adjusted gross income and bring the net investment income tax into play, which is why planning is important. Start the year by determining if you can turn a passive activity into an active business by increasing the hours you spend participating in the activity. You might also calculate whether directing this year’s investments to tax-free municipal bonds or municipal bond funds makes sense. Income from those sources won’t increase your net investment income or your modified adjusted gross income.
Prepare for the effect of retirement on your income tax return.
Is this the year you’re going to retire? What changes will retirement entail? Will you be selling a business? A home? Will you move to a new state? As you contemplate these major decisions, take time for discussions about withdrawal strategies from IRAs and pensions, the allocation of assets within your retirement accounts, the taxation of social security benefits, and the impact of one spouse continuing to work.
Analyzing and understanding the investments in your IRA can keep you from being surprised by this tax.
Avoid unexpected tax bills on assets in your IRA.
The general rule is that assets in your IRA grow tax-deferred, meaning you typically pay tax on the earnings when you withdraw the funds. However, some investments can generate income subject to a current tax that is paid by your IRA. The tax, known as the unrelated business income tax, can be triggered by income from a business or certain real estate investments. Analyzing and understanding the investments in your IRA can keep you from being surprised by this tax. This type of analysis can also prevent investments in “prohibited transactions” that can make your entire IRA taxable.
Give us a call to schedule an appointment for beginning-of-the-year tax planning. We’re ready to help you minimize your 2016 tax bill.