The end of 2018 is quickly approaching, but there are a few key money moves you should make before the new year, especially in light of the Tax Cuts and Jobs Act. The higher standard deduction means more Americans will ditch itemizing their 2018 federal tax returns.
That means you should probably focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here are a few key items to tackle before the ball drops on the new year.
Take Stock of Losses
If you follow the stock market, you know that the last few months have been volatile, so there’s a good chance that some of your investments have become losses. That might sound bad, but any losses that are in a taxable account, such as an investment account, bank account, or money market mutual fund, can be sold to offset other taxable investment gains in the same year. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year.
Max Out Retirement Savings
As close as possible, that is. The more money you put into your 401(k), the more financial security you’ll have in the long run, but a lot of these contributions also reduce your taxable income. At this point you probably only have one or two more paychecks from which to have funds withheld, but even a few hundred dollars more can provide some near-term tax relief as well as bolster your retirement savings.
Fund Your HSA
You have until the 2018 tax-filing deadline to fully fund your health saving account (HSA) in order to get a bigger deduction. The maximum limits are:
- Individuals: $3,450
- Families: $6,900
- 55 or older: an additional $1,000 catch-up contribution
These accounts can roll over indefinitely, so they’re a smart way to save for future medical expenses. HSAs also have a triple tax benefit: contributions are tax-deductible (even if you don’t itemize), earned interest is tax-free, and withdrawals are tax-free as long as they’re used to pay for qualified medical expenses.
Use Up Your FSA
The funds in a flexible spending account typically don’t roll over to the next calendar year. However, some employers allow $500 to carry over into the new year or grant employees until March to spend FSA funds. Even so, now is a good time to use the pretax dollars for doctor appointments, flu shots, and even some “everyday” drugstore items, such as non-prescription reading glasses, contact lenses and solutions, and reading glasses.
If you’re wondering whether you should itemize your 2018 tax returns or take the standard deduction, here are a few last things to keep in mind:
- Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs.
- Property taxes: If you paid less than the $10,000 limit for state and local taxes, your state may allow you to prepay 2019 property taxes. This way you’ll get the most from the state and local taxes deduction.
- Mortgage Interest: Provided you’re not near the cap on the mortgage interest deduction, which is $750,000 after the new tax law, you can make your January mortgage payment in December to boost the amount of interest you paid during the 2018 tax year.
- Charitable donations: If you routinely give to charities, double up on contributions and make your 2019 donation before year’s end. If you put the double donation into a donor advised fund, which is like a charitable investment account, you’re eligible to take an immediate tax deduction. That means you can take the deduction for 2018 while your funds are invested for tax-free growth, allowing you to make distributions to charity next year or beyond.
Are your employees reimbursed for work-related travel expenses? If not, you might want to reconsider. Changes under the Tax Cuts and Jobs Act make reimbursements even more attractive to employees.
The new tax code implemented significant changes to moving and travel expenses, including business-related travel expenses incurred by employees. Under the previous law, work-related travel expenses that weren’t reimbursed were generally deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to take advantage of the deduction because they a) didn’t itemize deductions, or b) didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.
With the new tax code, business travel is still entirely deductible, but not by individual taxpayers because miscellaneous itemized deductions, including employee business expenses, are no longer permitted to be claimed on individual tax returns. Instead, only businesses are able to deduct these expenses, which is why business travel expense reimbursements are now more significant to current employees and more attractive to prospective employees.
In order to be deductible, travel expenses must be valid business expenses and the reimbursements must adhere to IRS rules – either with an accountable plan or the per diem method.
Employee expenses reimbursed under an employer’s accountable plan do not contribute to the employee’s income. The accountable plan is a formal agreement to advance, reimburse or grant allowances for business expenses. To qualify as an accountable plan, it must meet the following criteria:
- Payments must be for “ordinary and necessary” business expenses
- Employees must substantiate these expenses (including amounts, times, and places) monthly
- Employees must return any advance or allowances they can’t substantiate within a reasonable time, typically 120 days
Plans that fail to meet these guidelines will be treated by the IRS as “non-accountable”,
and reimbursements will be included in the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).
In some cases, the per diem method may be used. Instead of tracking actual business travel expenses, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Substantiation of time, place, and amount must still be provided, and the IRS imposes heavy penalties on businesses that routinely pay employees more than the appropriate per diem amount.
If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at email@example.com.
The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.
The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.
The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.
If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.
Understanding self-employment taxes can be intimidating, but it’s important to educate yourself so you don’t miss out on deductions that can lower your tax bill. Below is a list of 15 self-employment tax deductions you may be eligible for as a freelancer or a self-employed individual.
1. Self-employment tax deduction
Self-employment tax is the portion of Medicare and Social Security taxes that self-employed individuals are required to pay, but you can claim 50% of this as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500.
2. Qualified Business Income (QBI) Deduction
As of January 1, 2018, self-employed taxpayers can deduct generally 20% of their qualified business income from qualified partnerships, S corporations, and sole proprietorships.
3. Home Office Deduction
If your home office is your primary place of business – and used solely for your business – you are permitted to deduct it from your taxes. You can also deduct a percentage of household expenses such as electricity, gas, water, trash, cleaning services, and certain repairs to the home.
4. Retirement Plans
If you use a qualified retirement plan, such as a 401(k), an IRA, or a simplified employee pension (SEP), you are able to deduct your contributions to that plan.
5. Office Supplies
Provided they are used solely for your business, materials such as tools, basic office supplies, and machinery (including service expenses) may be deducted.
Capital expenses that experience the gradual loss of value (particularly business equipment or buildings) through increasing age, natural wear and tear, or deterioration may be deducted if they are used to generate income for your business.
7. Educational Expenses
Business-related educational expenses, such as continuing education classes, seminars and conferences, conventions and trade shows, and subscriptions and dues for industry organizations can all be deducted.
8. Health Insurance
If you are self-employed or own more than 2% of your S Corporation, you can deduct health insurance premiums for yourself and any dependents under the age of 27.
9. Advertising and Promotion
Any materials or services used to promote your business, such as business cards, web hosting, full media advertisements, etc. are deductible.
10. Internet Fees and Communication Expenses
Internet costs can be deducted, but only the percentage of time that it’s used for business purposes. Cell phone services also may be deducted in the proportion that it relates to business usage. To keep the personal vs. business line clear, it’s recommended to have separate computers and phones for business when possible.
If you use your car for your business, you can take a standard mileage deduction, or take a deduction based on actual costs of fuel, maintenance, licensing, and depreciation. Some public transportation expenses are also deductible. Good record and receipt keeping as proof of business is key here.
12. Bank Fees and Interest Charges
As long as your business bank account is separate from your personal account, some bank fees connected to your business account may be deductible. Likewise, you can deduct interest on credit card balances and loans that are directly linked to your business.
Some business travel expenses can be deducted by 100% if they occur away from your home office and are considered necessary. Under the new Tax Cuts and Jobs Act, certain entertainment write-offs have been removed, but the 50% deduction on food and beverage expenses is still applicable.
14. Security System
If you work from a home office, you can deduct a percent of the expenses of a total home security system, and the purchase and installation of the system can be included when calculating depreciation.
15. Moving Expenses
If you move more than 50 miles from your location for business purposes, you are able to deduct most incurring expenses, such as transportation, packing, and utility connection fees.
Although it might be difficult to imagine not claiming a tax refund, the IRS has estimated that nearly 1 million Americans have not claimed tax refunds from the 2014 tax year (filed in 2015), refunds that total over $1 billion. The IRS is also reminding taxpayers that they have until this year’s official tax day (April 17) to file those returns and receive their refund. The average refund owed from the 2014 tax year is $847 and taxpayers have three years from when they are supposed to file to claim a refund. After that time, the funds are considered property of the U.S. Treasury.
If you are owed a refund, there is no penalty for filing late, however, you must also have filed (or currently file) for your 2015 and 2016 returns. Refunds from 2014 will first be applied toward any money owed to the IRS or a state tax agency, and can also be used toward past due federal debts such as unpaid child support or student loans. Failing to file a return for 2014 could cost some taxpayers more than just an $850 refund; low or moderate income workers could be eligible for the Earned Income Tax Credit (EITC), which was worth as much as $6,143 in 2014.
So why did so many Americans fail to claim their refunds?
- As mentioned, many taxpayers fail to apply for the EITC. To qualify, your income must have been below $46,997 (or below $52,427 if married filing jointly) and you claimed three or more qualifying children; $43,756 for those with two qualifying children ($49,186 married filing jointly); $38,511 for taxpayers with one qualifying child ($43,941 married filing jointly); and $14,590 for people with no qualifying children ($20,020 married filing jointly).
- If you make under a certain amount annually, you do not have to file taxes. In 2014, single Americans over the age of 65 who earned less than $11,500, singles under 65 who earned $10,000 or less, or those married filing jointly who made less than $20,000 did not have to file. However, even though they did not have to file does not mean taxes were not taken out of their paychecks, which means those taxpayers could be owed a refund. Those who made estimated tax payments that year could also have overpaid in taxes, earning them a refund.
- Many students or their parents fail to claim the American Opportunity Education Credit, which allows education-related expenses such as course books, room and board, tuition and other education supplies and equipment to be deducted. In 2014, the credit maxed out at $2,500.
- Some individuals move and do not update their addresses correctly, which means refund checks and sent back to the IRS and left unclaimed. Other individuals simply forget.
How can I claim my money?
If you did not file for the 2014 tax year, and you think you may be owed a refund, the IRS suggests that you find applicable tax documents such as your W-2, 1098, 1099 or 5498 for the 2014, 2015 and 2016 tax years. If you are unable to find these forms or get them from your employer, act quickly and request a wage and income transcript from the IRS on their website or by phone at 800-908-9946, as transcripts can take between 5-10 days to be received in the mail.