The first tax season under tax reform is in the books. What are some tax planning considerations for the rest of the year? For many investors, changes in tax rates and limits around deductions resulted in new strategies. Taking a deeper look at how the 2018 tax filing can guide taxpayers going forward.

From payroll deductions to retirement planning, there are many considerations for investors as they look ahead.

1. Review withholding and make adjustments

  • Taxpayers want to make sure they are not paying more taxes during the year than necessary. Withholding too much actually provides the Treasury Department with an interest-free loan.
  • Some taxpayers did not have enough earnings withheld and consequently owed more taxes than anticipated with their 2018 filing.
  • This tax season, the Internal Revenue Service waived the penalty for certain taxpayers whose withholding or estimated tax payments did not meet their total tax liability for the year. Going forward, taxpayers need to make sure they pay at least 90% of their tax liability through withholding.
  • Certain transactions, such as a large capital gain, could also mean that withholding adjustments are needed.

2. Examine the tax return for planning opportunities

This year’s tax season marked the introduction of a new Form 1040. A review of several items on the form may yield planning ideas.

Line 2b (taxable interest). Based on the tax bracket and financial situation, an investor may want to consider municipal bonds to generate tax-free income.

Line 4b (IRAs, pensions, and annuities — taxable amount). A taxpayer may be withdrawing too much — or too little — from retirement accounts. Retirees in the lowest tax brackets may want to consider distributing more than the required minimum to take advantage of the lower tax rate. With increasing federal budget deficits, it is possible that tax rates could move higher in the near future. Also, individuals age 70½ or older can avoid taxation on distributions from their IRA up to $100,000 annually if the funds are sent directly to a qualified charity. This may include the required minimum distribution (RMD) as well.

Line 8 (standard or itemized deductions). With the near-doubling of the standard deduction, coupled with limits on many itemized deductions (SALT, miscellaneous deductions, etc.), fewer taxpayers will choose to itemize. In fact, the vast majority of tax filers opted to claim the standard deduction. However, there may be opportunities for taxpayers to strategically time or lump deductions into one tax year in order to itemize deductions.

3. Assess retirement savings strategies

  • Consider increasing tax-deferred retirement plan contributions to lower your taxable income. The salary deferral limit for 401(k) plans increased from $18,500 in 2018 to $19,000 in 2019. Investors age 50 or older may take advantage of catch-up contributions ($6,000 within 401(k) plans, $1,000 for IRAs).
  • Based on your tax bracket and projected income for 2019, review the advantages of different types of retirement savings vehicles. Investors may want to weigh whether it makes more sense to save in a traditional, tax-deferred account or to explore Roth IRA accounts. Additionally, the elimination of the Roth recharacterization feature in the tax reform law impacts Roth IRA conversions. Overall, having a portion of retirement savings in Roth accounts can create tax diversification and act as a hedge against the risk of higher tax rates in the future.
  • It is important to make sure beneficiary designations on retirement accounts are up to date.

Tax efficiency is part of a comprehensive plan

Tax-efficient planning is a key part of a comprehensive financial plan. The 2018 tax filing represented changes for many taxpayers. A financial advisor can offer guidance on incorporating these lessons learned in tax planning for the coming year.


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