There is a new tax law but taxpayers can still take advantage of some of the breaks that the government has set in place. And with 2018 about to end, there is still time to take advantage of them. It may be tricky, but it is still doable.
The Tax Cuts and Jobs Act of 2017 basically reduces tax rates by amending the Internal Revenue Code of 1986. There are so many changes in the new law especially when it comes to the individual income tax particularly on the tax brackets. Tax rates are lowered and standard deductions are increased. There will be no more personal exemptions and family tax credits are increased. Itemized deductions are also lowered. This is why not a lot of people actually itemize under the new law.
Here are some of the approaches you can use in order to boost your refund and lower your tax bill for 2018:
Retirement savings should be maximized
When you contribute to your retirement plan—the 401 (k) from the retirement plan of the company you work for—you will be able to reduce the amount considered as taxable income. Maximize your contribution by Dec. 31. Anyway, there is really no harm to putting a lot of your money in the 401 (k), this is your retirement savings anyway. It’s actually your future. There is no harm saving for the future.
Make sure you’ve maxed out how much you can contribute. When you don’t do this, it’s the same leaving money on the table.
As soon as you become a legal adult, you can contribute as much as $18,500 to your retirement fund. That’s the amount you can maximize this year. But if you are 50 years old and older, you can add $6,000 more. But this is for the 401 (k). There is also the Individual Retirement Account (IRA) where you can contribute as much as $5,500. Again, if you are 50 years old and above, you could add another $1,000. For the IRA, a citizen has until April to hand over your IRA contributions.
There is another retirement fund for the self-employed called the SEP IRA or the simplified employee pension IRA. If you are using this kind of retirement contribution, you can actually use up to 25 percent of your compensation for this fund—that is more or less $55,000 for this year. For those who contribute to the Roth 401 (k) or Roth IRA, there won’t be a tax break but the retirement money can grow tax-free and be withdrawn tax-free as well.
Make extra mortgage payments
Fewer homeowners will benefit from the mortgage tax break under the new law. But there is still the mortgage-interest deduction that some 13.8 million taxpayers could still take advantage of. But if you want to take advantage of that kind of tax break, here is what you do: when you get the mortgage-interest deduction from your home, go the extra mile by making an extra payment on Dec. 31 so that you will get an extra deduction in your taxes for 2018. New homeowners or those who purchased their house after Dec. 15, 2017 could write off only $750,000 in loans. But they will still be able to take advantage of the tax break.
Say goodbye to bad investments
The market is not doing so well this year, so if you lost some investments, then you could still cut your losses and do better. As for the losses you incurred from bad investments, these can actually be utilized to zero out capital gains. You may cut up to $3,000 against ordinary income in a year. Losses over $3,000 can be carried over to the next years. This process is called the tax-loss harvesting. This is among the more popular way of maximizing the benefits of after-tax returns. This is usually done around the end of the year because investors want to lower tax liability.
Expenses related to healthcare could be deducted
When your healthcare expenses go beyond 7.5 percent of the adjusted gross income for the year, these could actually be deducted. Healthcare expenses cover those you spent on health insurance, Medicare, expenditure from nursing home and orthodontics. You can add all those expenses and check out if it would exceed the threshold of medical expenses because these could be deducted. You can deduct everything that goes beyond that amount, but it only applies to all of your itemized deductions, not on standard deduction.
Sum up donations to charity
There might be a new tax law but when it comes to charitable donations, the guidelines are almost the same. But you still need to enumerate them in order to claim the deduction. But there is a scheme called “bunching.” This is a process by which you donate every two to three years instead of every year. This will allow you to have itemized deductions in a year and get the standard deduction the next year. You could make 2019 donations before Dec. 31 so it could still be counted as part of the 2018 return.
Try to defer your bonus
Most of you enjoy a year-end bonus in the office, which means additional income for the year. As a result, there is a possibility that your income bracket will go up, hence, increase your tax. Does it really matter if you get your bonus in January? That’s not that far off. It may only be a matter of weeks but you don’t need to pay the tax for that bonus until you file the next tax return.
Okay, this may seem like an odd advice but it actually comes from a practical mindset. By the turn of the year, alimony won’t have any deduction anymore. It will become tax-free like child support. But for those paying alimony this year, the payment could be deducted from the taxable base. High-income couples might want to take advantage of this break. But of course, you can’t just make this decision based on tax break. It’s just a suggestion that if you are headed in that direction anyway, you might take advantage of the benefits as well.
The year is almost over but there is still time to be smart about your taxes. Pay your taxes and help the government—but to do that, help yourself as well.
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