It’s not too early to plan ahead for next year’s taxes
Because of new laws, your situation might look different
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 irs.gov.
❚ 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 irs.gov 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.