Posted on: 13 February 2019Share
Many Americans have discovered that their 2018 income taxes were vastly different than their 2017 taxes — often resulting in significantly lower refunds or even amounts due. If this happened to you, what should you do to ensure that 2019 isn't a repeat? Here are a few steps to take.
Consider a Pass-Through Entity. Pass-through entities are small business ventures that don't file separate taxes from the owners. They generally include LLCs, sole proprietorships, and partnerships. The tax reform bill of 2017 allowed for lower taxes to these types of businesses, including a new 20% deduction against taxable income. Work with your tax planner to determine if you can become a pass-through entity and if it will result in lower taxes.
Use New Credits. If you lost deductions normally taken through itemizing or through the personal exemptions under the old system, make sure you're taking all the new ones to compensate. You can, for instance, take a new tax credit for providing a home for relatives who aren't your own children. And even adult children or older family members can make you eligible to claim Head of Household status or deduct that certain of the dependent's expenses.
Boost Retirement Savings. Most types of retirement accounts have tax benefits either in the current year or in the future. Reduce 2019 tax liability by adding more to your IRA or company 401(k). Any additional amount you contribute reduces taxable income.
Increase Nontaxable Income. There are a variety of ways to boost your income that's not subject to taxes. You can, for instance, rent out part or all of your home for up to 14 days without having to declare that income for tax purposes. Opt for nontaxable investments, such as municipal bonds, in any taxable portfolios you have. And consider negotiating better benefits rather than higher income next year.
Plan Early. If you were blindsided by changes this year, be proactive about the current year's tax situation. Withholding tables will likely be altered by the IRS in the spring, so you may see more changes. The best way to address them is to do personal tax planning while you still have plenty of time to make adjustments. For the best results, check in with your tax professional over the summer and again in the fall.
Which of these tax planning strategies can you implement? No matter what steps you take, the result will be less of a tax bite when figuring your 2019 taxes — surely worth all your effort.