It’s not too early to plan ahead for next year’s taxes

Be­cause of new laws, your sit­u­a­tion might look dif­fer­ent

USA TODAY US Edition - - MONEY - Russ Wiles

An­other tax-re­turn fil­ing sea­son ba­si­cally is in the bag, and the last thing you want to think about is taxes. It’s not too early to plan ahead.

These tips might bear fruit down the road:

❚ Re­view your re­turn with some skep­ti­cism: It’s of­ten a good idea to look at your just-com­pleted fed­eral and state tax re­turns, es­pe­cially if you had some­one pre­pare them for you.

Among ac­tion items: Con­trib­ute more to re­tire­ment plans, check for ad­di­tional de­duc­tions and reeval­u­ate your pay­check with­hold­ings (and, if rel­e­vant, es­ti­mated tax pay­ments).

One caveat is your sit­u­a­tion might look dif­fer­ent in

2018 com­pared with 2017 as a re­sult of tax re­form. In par­tic­u­lar, the in­crease in the stan­dard de­duc­tion could mean a lot fewer peo­ple item­ize. This will cre­ate op­por­tu­ni­ties to “bunch” de­duc­tions — dou­bling up on ex­penses to qual­ify for de­duc­tions one year while skip­ping the next — said Paul Ja­cobs, a cer­ti­fied fi­nan­cial planner and en­rolled agent with Pal­isades Hud­son Fi­nan­cial Group.

❚ Pon­der cap­i­tal losses: With the stock mar­ket up sharply most of the prior nine years, in­vestors didn’t have many money-los­ing po­si­tions in their port­fo­lios. That’s not nec­es­sar­ily the case any­more, with the mar­ket spend­ing much of 2018 in the red. It thus might make sense to har­vest some money-los­ing po­si­tions and rein­vest the pro­ceeds in some­thing else.

Ba­si­cally, re­al­ized losses off­set re­al­ized gains for tax pur­poses. To the ex­tent you have losses that ex­ceed your gains, up to $3,000 of the ex­cess can be de­ducted against or­di­nary in­come an­nu­ally. Net losses be­yond $3,000 can be car­ried for­ward to fu­ture years.

Those rules, and most other pro­vi­sions re­lated to cap­i­tal gains and losses, weren’t af­fected by tax re­form, said Mark Lus­combe, a prin­ci­pal an­a­lyst at tax re­searcher Wolters Kluwer.

❚ Con­sider Roth con­ver­sions: Roth In­di­vid­ual Re­tire­ment Ac­counts are nice. In gen­eral, with­drawals from these ac­counts are tax-free. Roth with­drawals thus won’t push you into a higher tax bracket, and they won’t po­ten­tially make your So­cial Se­cu­rity ben­e­fits tax­able (as­sum­ing you are draw­ing So­cial Se­cu­rity).

The no­table draw­back when you move or “con­vert” tra­di­tional IRA money into a Roth is that you must pay taxes on the amount you’re trans­fer­ring. If you de­cide to do a Roth con­ver­sion, use non-IRA money to pay for it.

One factor work­ing against Roth con­ver­sions is that Congress last year did away with the op­tion of can­cel­ing or “rechar­ac­ter­iz­ing” a trans­fer af­ter the fact, Lus­combe noted. So if you’re go­ing to do a con­ver­sion, make sure it’s the right move.

❚ Get or­ga­nized: It’s smart to have a good record­keep­ing sys­tem for fil­ing re­ceipts and state­ments through­out the year. Make copies of your re­turns and safe­guard them.

If you have elec­tronic copies, con­sider back­ing them up on thumb drives or other de­vices sep­a­rate from your com­puter. The gen­eral rule is to re­tain re­turns and sup­port­ing doc­u­ments at least three years, though cer­tain items should be kept longer, such as state­ments show­ing how much you paid for your home or in­vest­ments. The IRS of­fers sug­ges­tions for how long to re­tain records at

❚ De­vise a tax-re­fund strat­egy: If you’re like most peo­ple, you re­ceived a tax re­fund and have al­ready spent it, used it to pay down debt or placed it into sav­ings. Re­funds rep­re­sent a large chunk of change for many peo­ple — some­times the largest amount of cash re­ceived all year.

One po­ten­tial prob­lem is that with­hold­ing amounts could drop for many, im­ply­ing their re­funds next year also could be lower. If you rely on re­funds to put your fi­nances in or­der, it might be time to come up with a backup plan.

Also, de­cide whether you want to keep get­ting large re­funds, if that’s the case. Yes, re­funds are nice, but they also rep­re­sent in­ter­est-free loans to Uncle Sam. Re­funds im­ply “you paid too much to the gov­ern­ment dur­ing the year and missed out on the in­come or in­vest­ment ap­pre­ci­a­tion you could have earned,” Ja­cobs said.

Then again, you may wind up hav­ing too much with­held, given new with­hold­ing rates for 2018 didn’t take ef­fect un­til around mid-Fe­bru­ary. Lus­combe sug­gests check­ing the new with­hold­ing cal­cu­la­tor at to see where you stand.

❚ State-level changes: Tax re­form en­acted at the fed­eral level will af­fect state tax poli­cies, too. More than half the states tie their tax codes to fed­eral rules and fre­quently make ad­just­ments based on what hap­pens in Wash­ing­ton.

Tax re­form re­moved var­i­ous ex­emp­tions and de­duc­tions at the fed­eral level but also low­ered fed­eral in­come-tax rates. Con­se­quently, many states will need to cut their own tax rates to keep res­i­dents — such as those who no longer find it worth­while to item­ize — from pay­ing more.

“States will look to an ar­ray of legislative and pol­icy op­tions to re­spond to the (pro­jected) rev­enue in­creases,” credit re­searcher Moody’s pre­dicts. Some states might lower their own in­come-tax rates.

Ac­cord­ing to Moody’s, states with large pro­jected rev­enue in­creases in­clude Michi­gan, Ne­braska, Ge­or­gia, Colorado, Minnesota, Mary­land, Ari­zona and New York.

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