President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.
Do You Have a Large Family?
The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:
- $12,000 for single (previously $6,350)
- $24,000 for joint-filing marries couples (previously $12,700)
- $18,000 for heads of households (previously $9,350)
The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.
Are You an Average Taxpayer?
If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).
Are You Withholding Enough from Your Paycheck?
The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.
Do You Have Older Children?
The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.
Do You Have High Property Taxes?
Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).
Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.
If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at firstname.lastname@example.org.
Established in 2003, HSAs allow individuals with high-deductible health plans to pay for current healthcare expenses and save for future healthcare expenses on a tax-favored basis. Money is deposited pre-tax, it grows tax-free, and is distributed tax-free as long as the funds are used for qualified health care expenses. Aside from the obvious benefit of tax savings, below is a breakdown of advantages and disadvantages of HSAs to help you determine if it’s a good fit for you.
- Most HSAs come with a debit card to make paying for prescriptions and other expenses easy. Bills can be paid over the phone with this debit card, and you can access cash at an ATM.
- Long lasting and portable. If you change health insurance plans, change jobs, or enter retirement, funds left in your HSA remain available for use. They can be used for qualified medical expenses and continue to grow tax free.
- Roll-over funds. Unlike FSAs (Flexible Spending Accounts), any money left in an HSA at the end of the year automatically rolls over to the next year.
- In addition to personal contributions to your HSA, your employer and anyone else may contribute, and the recipient of the contribution receives the tax deduction for the amount contributed.
- High deductible requirement. Although you pay less in monthly premiums, you are responsible for all healthcare costs until the deductible is met.
- Unexpected healthcare expenses. It’s possible that healthcare costs could exceed your HSA savings.
- Savings ambition. The desire to save money versus the necessity for healthcare when you need it could set up an internal struggle.
- Recordkeeping. This time-consuming task is a necessity as you’ll have to keep receipts and prove that withdrawals were used for eligible healthcare expenses.
- Taxes and penalties. Withdrawing funds for non-qualified expenses before age 65 results in a 20 percent penalty and taxes owed; after age 65 you’ll pay taxes but no penalty.
- Fees. Some HSAs charge monthly maintenance or per-transaction fees, though typically not high. Sometimes if a certain minimum balance is maintained, these fees can be waived.
As you approach retirement you’re probably going to be asking yourself when to collect social security benefits. After all, the longer you wait, the more money you can secure. For instance, as long as you’ve paid into the program for 40 quarters (or roughly 10 years), you can start collecting as early as age 62, though full social security retirement age ranges from 65 to 67 for people born after 1943. If you can hold off a few more years, however, your benefit increases by about 8% every year until age 70.
Experts recommend that one thing to look at is whether or not you can afford to wait. Do you have financial flexibility with other assets that can cover your expenses, or do you need the extra monthly payment to keep with the lifestyle to which you’ve grown accustomed? If it’s the latter, you may be forced to withdraw sooner or make changes to your lifestyle. What about existing investments? If you collect early, your investments can grow longer, but they would have to grow by at least 8% a year just to equalize the loss from collecting early.
As you decide when to start withdrawing social security, take into account the age at which you’re planning to retire. If you’re still in the workforce when you become eligible to receive benefits, you can start collecting social security. However, there are some potential downsides to consider. For example, if you haven’t reached your full retirement age, you lose $1 for every $2 you earn above the $15,480.00 earning limit. Your benefits are recalculated to recover those lost benefits once you reach full retirement age, but it can take up to 15 years just to restore the loss.
Another consideration to look at is your marriage status. If you’re married, experts recommend that the higher earner in the marriage hold off on collecting benefits for as long as possible. However, it’s possible for the higher earner to file for benefits at retirement age and then suspend them, which could allow your spouse to collect a spousal benefit equal to ½ of your full retirement benefit. Meanwhile, your benefit continues to grow until age 70.
Lastly, consider your health. If you’re in poor health, you might be better off taking benefits early. According to the Social Security Administration, if you live to the average life expectancy for your age, you’ll get about the same amount of benefits no matter when you start collecting. The longer you live beyond that age, the more you’ll benefit by delaying payments.
With so many factors to consider, there is no “right” age to start collecting social security benefits, so just be sure that you’re making an informed decision when the time comes.
For some employees, simply opening a Roth IRA or another retirement account independent of your employer may be sufficient and necessary. But many employees should consider digging into the details of why your employer does not offer a retirement savings plan. And if you think your company is one of the few who doesn’t offer one, unfortunately, nearly half of U.S. companies don’t provide their employees with a 401(k).
When it comes to smaller firms, many avoid the offering simply due to high start-up costs and time commitments, as administering the plan and ensuring it meets regulatory requirements can take serious time and attention. Retirement offerings also present significant liabilities for firms, including civil or criminal penalties for plan administrators if legal and regulatory compliance is not met. According to the Census Bureau, the combination of fees, time and risk may be why over 90% of small businesses do not offer a 401(k). Others may simply not be aware their employees desire a plan.
Like your company, but want help saving for retirement?
If you would like to see your company add a 401(k) plan, the first step is talking to other employees to determine the collective interest in a plan and how many individuals would “buy in” if offered one. Your employer may not be persuaded by one employee’s desire for a plan, but a group request will likely garner more weight. Remind your employer they would also reap benefits from a business standpoint (lowering taxes) and a personal standpoint (their own retirement savings).
Step two involves doing your homework. Is your boss concerned about the risks involved? There are plans whose providers will share legal responsibilities, so research plans and present several options to your supervisor. Is time or added work/stress the issue? Talk amongst your co-workers and determine a strategy for divvying up duties so one person isn’t burdened with added responsibilities. Supportive plan providers can also help companies create a structured strategy to manage the extra work
Overcoming hurdles to a company 401(k)
What if cost is my employer’s biggest concern? Plan start-up fees can sound daunting to small firms, but consider the company’s spending and ways those costs could be mitigated or offset, such as through tax savings or by redistributing the holiday party budget to cover expenses. Inform your employer that many employees might prefer or expect a 401(k) over a holiday party, so using those funds could attract and retain quality employees.
Being prepared and showing your boss that the added time and effort is advantageous will go a long way. Offering a 401(k) can grow their business, supplement their goals and maintain and engage new employees, which is critical in today’s job market. Taking the time to research beforehand and help whoever is in charge throughout the process may seem like the last item you want to add to your plate, but the benefits are twofold for you as well. Not only will you be able to start saving for retirement in a tax-advantaged way, but your employer may also notice your strategic drive, organization and initiative, which could benefit you as new company opportunities or initiatives arise.
Millennials and Roth IRA’s: Why the Two Make a Perfect Pair
Beginning in 2018, the new tax laws are officially implemented, which could spell a shift in take home pay for many workers. And, if your employer has begun using the new withholding tables, you could see a change in pay this month. The Congressional Budget Office has approximated that employers could withhold around $10-15 billion less from employees each month by utilizing the new withholding tables.
Many taxpayers may be wondering if they will actually see any of that $10-$15 billion on their regular paychecks? An increase in take-home pay will be based on the number of allowances you take, how often you are paid and if you file jointly or are a single filer. So, for the average single filer who makes between $46,000-$162,000 and is paid bi-weekly, your paycheck will likely increase between $40 and $190. For married filers who make between $61,000-$167,000, you could see a bi-weekly pay increase between $30 and $172.
However, there are other factors in play that could offset any pay increases taxpayers might see. While the federal tax cuts might increase take-home pay for the average workers, other changes in deductions might counteract a boost in pay. Although the federal tax rates changed, some state or local taxes may have increased for some workers. Many companies make health benefits or other benefit changes at the start of a new year as well, which would ultimately influence a worker’s final take-home amount.
Whether you see a pay increase or not, all employees should consider re-evaluating their withholding allowances. Why? Withholding tables are intended to provide a ballpark figure of how much tax should be taken from your pay, but this year’s estimation could be a bit looser than previous years.
The new tax laws change elements that affect how many allowances workers claim. For example, some personal exemptions have been eliminated, itemized deductions have been reduced and tax credits have been altered. The new withholding tables do incorporate the tax code changes, but taxpayers were not required to fill out a new W-4 form. Therefore, the number of allowances selected when your last W-4 was filed could be rather inaccurate now.
How do you know if your allowances need to be modified? Taxpayers can speak with a tax adviser to decide the correct withholding amounts. Another option is to use the new withholding calculator the IRS plans to release at the end of February, which is designed to help employees calculate if they are claiming too little or too much in light of the tax changes. If you do decide to change withholding amounts, you will need to submit new instructions to your employer.