2018 Tax Filing Data Shows Need to Review Withholding
The IRS continues to encourage taxpayers to review the amount of tax they have withheld to avoid an unexpected tax surprise when they file their 2019 tax returns next year. Preliminary 2018 tax filing data seems to show the need for taxpayers to review their withholding in order to make sure the appropriate amount of tax is being withheld from their paychecks to reflect recent tax law changes.
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act made significant changes to the tax code, and 2018 was the first time that taxpayers filed with the new rules. Among other changes, the legislation modified individual income tax rates and brackets, eliminated the personal and dependency exemptions, raised the standard deduction amounts, limited certain itemized deductions (including the deduction for state and local taxes), increased the child tax credit and its phaseout thresholds, added a credit for other dependents, and increased the alternative minimum tax exemption amounts and the exemption phaseout thresholds.
2018 tax filing statistics
Preliminary data for the 2018 tax year shows that more than 106 million federal income tax individual returns resulted in refunds, with an average refund of $2,879. Over 24 million individual returns showed tax due at the time of filing, averaging $5,160.1 Because of the difficulty many taxpayers seemed to have with their 2018 tax year withholding (some may not have realized changes were needed), the IRS waived certain penalties for many 2018 tax returns. It is important that you get withholding right for 2019 while there still may be time for any adjustments to take effect.
Getting it right
If you have too much tax withheld, you will receive a refund when you file your tax return, but it might make more sense to reduce your withholding and receive more in your paycheck. If you have too little tax withheld, you will owe tax when you file your tax return, and you might owe a penalty. You can generally change the amount of federal tax you have withheld from your paycheck by giving a new Form W-4 to your employer. You can use a number of worksheets for the Form W-4 or the IRS Withholding Calculator (available at irs.gov) to help you plan your tax withholding strategy.
If changes reduce the number of allowances you are permitted to claim or your marital status changes from married to single, you must give your employer a new Form W-4 within 10 days. You can generally submit a new Form W-4 whenever you wish to change your withholding allowances for any other reason.
In general, you can claim various withholding allowances on the Form W-4 based on your tax filing status and the tax credits, itemized deductions (or any additional standard deduction for age or blindness), and adjustments to income that you expect to claim. You might increase the tax withheld or claim fewer allowances if you have a large amount of nonwage income. (If you have a significant amount of nonwage income, you might also consider making estimated tax payments using IRS Form 1040-ES.) The amount withheld can also be adjusted to reflect that you have more than one job at a time and whether both you and your spouse work. You might reduce the amount of tax withheld by increasing the amount of allowances you claim (to the extent permissible) on Form W-4.
You can claim exemption from withholding for the current year if: (1) for the prior year, you were entitled to a refund of all federal income tax withheld because you had no tax liability; and (2) for the current year, you expect a refund of all federal income tax withheld because you expect to have no tax liability.
If you need help, talk to a tax professional about your individual situation.
1Internal Revenue Service, 2019
Qualified Charitable Distributions (QCD)
Changes in tax laws can require updating your planning.
The 2017 tax act has caused many to rethink their charitable giving. Charitable contributions for those over the age of 70.5 may benefit them by making their charitable contributions directly from their Individual Retirement Accounts (IRA). These QCDs are treated as part of the Required Minimum Distribution (RMD) for the year they are distributed, but are not taxed.
You must be at least 70.5 when you make the contribution.
The contribution must be made from a traditional IRA. Payment from other retirement accounts do not qualify.
The payments must be to a public charity.
The maximum annual amount cannot exceed $100,000. There is no limit on the number of distributions or charities you make contributions to.
The distribution must be made directly from your IRA account to the charitable organization.
You may not receive benefits in exchange for the contribution. Examples include tickets to paid events and preferential seating.
The distribution must be part of your RMD. Amounts contributed after you have withdrawn your RMD do not qualify as QCD. If you have already taken your annual RMD for the year, you cannot make a QCD for the year. Plan the timing of your QCD before you have taken your RMDs for the year. Distribute your QCDs early in the year before you have withdrawn all your RMDs for the year.
Include a cover letter specifying the payment is a QCD and request an acknowledgement.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
2018 Year-end opportunity
The end of the year presents a unique opportunity to look at your overall personal financial situation. With factors like tax reform, life changes or just working towards your goals, end of year is an especially important time to review things. Weaving together your prior planning, subsequent changes and revised goals helps you stay on course. Following are some things you consider before the year ends.
Income Tax Planning –Ensure you are implementing tax reduction strategies like maximizing your retirement plan contributions, tax loss harvesting in portfolios and making charitable contributions can all help reduce current and future tax bills. It is also good to review your current year tax projection based on your income and deductions year to date and how that may be different from before.
Estate Planning – Examine your current estate plan to visualize what would happen to each of your assets and how the current estate tax law will impact you. Be sure that your estate planning documents are up to date – not just your will, but also your power of attorney, health care documents, and any trust agreements and beneficiary designations are in line with your desires. If you have recently been through a significant life event such as marriage, divorce or the death of a spouse, this is especially important right now.
Investment Strategy– The recent market volatility has some people feeling uncomfortable. Market declines are a natural part of investing, and understanding the importance of maintaining discipline during these times is imperative. Regular portfolio rebalancing will allow you to maintain the appropriate amount of risk in your portfolio. And, if you are retired and living off your portfolio, you also want to maintain an appropriate cash reserve to cover living expenses for a certain period of time so that you do not have to sell equities in a down market.
Charitable Giving – There are many ways to be tax efficient when making charitable gifts. For example, donating appreciated stock could make sense in order to avoid paying capital gains taxes. Further, you may want to consider bunching charitable deductions by deferring donations to next year or making your planned 2019 donations ahead of time. If the numbers are large enough, you might even consider a private foundation or donor advised fund for your charitable giving. If you are at least 70.5 you may want to consider Qualified Charitable Distributions (QCD) from your IRA.
Retirement Planning –Think about your future when working becomes optional. Whether you expect a typical full retirement or a career change to something different, determining an appropriate balance between spending and saving, both now and in the future is important. There are many options available for saving for retirement, and we can help you understand which option is best for you. If you are at least 70.5 you should be sure your 2018 Required Minimum Distributions (RMD) from your IRAs are paid before year-end. Qualified Charitable Contributions, up to $100,000, will be treated as part of your RMD but not taxed.
Cash Flow Planning – Review your 2018 spending and plan ahead for next year. Understanding your cash flow needs is an important aspect of determining if you have sufficient assets to meet your goals. If you are retired, it is particularly important to maintain a tax efficient withdrawal strategy to cover your spending needs. If you have not yet reached age 70.5, it is prudent to ensure you are making tax-efficient withdrawal decisions. If you are over age 70.5 make sure you are taking your RMDs because the penalties are significant if you don’t.
Risk Management – It is always a good idea to periodically review your insurance coverages in various areas. Recent catastrophic events like hurricanes serve as a powerful reminder to make sure your property insurance coverage is right for your needs. If you are in a Federal disaster area, there are additional steps necessary to recover what you can and explore the tax treatment of casualty losses. Other areas of risk management that may need to be revisited include life and disability insurance.
Education Funding – Funding education costs for children or grandchildren is important to many people. While the increase in college costs have slowed some lately, this is still a major expense for most families. It is important to know the many different ways you can save for education to determine the optimal strategy. Often, funding a 529 plan comes with tax benefits, so making contributions before the end of the year is key. With the added flexibility of funding k-12 years (set at a $10,000 limit), 529 accounts become even more advantageous.
Elder Planning – There are many financial planning elements to consider as you age, and it is important to consider these things before it’s too late. Having a plan in place for who will handle your financial affairs should you suffer cognitive decline is critical. Making sure your spouse and/or family understands your plans will help reduce future family conflicts and ensure your wishes are considered.
The decisions you make each year with your personal finances will have a lasting impact. I hope this has begun to generate some insight to areas of your personal finance that need attention. Please contact me if you have any comments or questions.
2019 retirement account limits announced by IRS
The limit on 401(k) contribution are increased to $19,000, $25,000 for those that are are 50 or older.
The limit on IRA contribution are increased to $6,000, $7,000 for those that are 50 or older.
IRA Adjusted Gross Income deduction phase- will start at $103,000 fir joint returns and $64,000 for single and head of household filers.
IRS Link: COLA Increases for Dollar Limitations on Benefits and Contributions
The above apply for contributions made for 2019 not for 2018 contributions made in 2019
Revised 2018 Optional Standard Rates
The changes apply for years beginning after 2017.
The recent tax legislation suspended (2018-2025) the deduction for miscellaneous itemized deduction subject to the 2% of adjusted gross income. Among the items that are not deductible during the suspension period are unreimbursed employee travel expenses and moving expenses. The notice states that the standard business mileage rate (54.5 cents per business mile) does not apply during the suspension period. The standard business mileage rate will only apply to deductions in determining adjusted gross income.
The maximum standard automobile cost for computing the allowance under a fixed and variable rate plan are $50,000 for passenger automobiles (including trucks and vans) placed in service after December 31, 2017.
The changes can be found in Notice 2018-42
Changing Market: Municipal Bonds After Tax Reform
January is typically a strong month for the municipal bond market, but 2018 began with the worst January performance since 1981, driven by rising interest rates and uncertainty over changes in the Tax Cuts and Jobs Act (TCJA).1 The muni market stabilized through April 2018, but uncertainty remains.2 The tax law changed the playing field for these investments, which could affect supply and demand.
When considering these dynamics, keep in mind that bond prices and yields have an inverse relationship, so increased demand generally drives bond prices higher and yields lower, and vice versa. Any such changes directly affect the secondary market for bonds and might also influence new-issue bonds. If you hold bonds to maturity, you should receive the principal and interest unless the bond issuer defaults.
Tax rates and deduction limits
Municipal bonds are issued by state and local governments to help fund ongoing expenses and finance public projects such as roads, water systems, schools, and stadiums. The primary appeal of these bonds is that the interest is generally exempt from federal income tax, as well as from state and local taxes if you live in the state where the bond was issued. Because of this tax advantage, a muni with a lower yield might offer greater value than a taxable bond with a higher yield, especially for investors in higher tax brackets.
The lower federal income tax rates established by the new tax law would cut into this added value, but the difference is relatively small and unlikely to affect demand. Many taxpayers, especially in high-tax states, may find munis even more appealing to help replace deductions lost to other TCJA provisions, including the $10,000 cap for deductions of state and local taxes.3 Tax-free muni interest can help lower taxable income regardless of whether you itemize deductions.
The large corporate tax reduction from a top rate of 35% to 21% is likely to have a more significant effect on demand for munis. Corporations, which own a little less than 30% of the muni market, may hold on to bonds they currently own but become more selective in purchasing future bonds.4
A tightening market
The supply of new municipal bonds dropped after the fiscal crisis as local governments became more cautious about borrowing. The TCJA further tightened the market by eliminating “advanced refunding” bonds, issued to replace older bonds at lower interest rates, which have accounted for about 15% of new issues.5
This is expected to reduce the supply of bonds for the next three years or so, but the long-term effects are unclear. If interest rates continue to climb, there is less to gain by replacing older bonds, but local governments may issue taxable bonds if they see an opportunity to reduce interest payments. There may also be changes to the structure of future muni issues.6
Risk and rising interest rates
Munis are considered less risky than corporate bonds and less sensitive to changing interest rates than Treasuries, making them an appealing middle ground for many investors. For the period 2007 to 2016, which includes the recession, the five-year default rate for municipal bonds was 0.15%, compared with 6.92% for corporate bonds. Most of those defaults were related to severe fiscal situations such as those in Detroit and Puerto Rico. The five-year default rate for investment-grade bonds (rated AAA to BBB/Baa) was just 0.05%.7
Treasuries, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are considered the most stable fixed-income investment, and rising Treasury yields, as occurred in early 2018, tend to put downward pressure on munis.8 However, Treasuries are more sensitive to interest rate changes, and stock market volatility makes both Treasuries and munis appealing to investors looking for stability.
Bond funds
The most convenient way to add municipal bonds to your portfolio is through mutual funds, which also provide diversification that can be difficult to create with individual bonds. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Muni funds focused on a single state offer the added value of tax deductibility for residents of those states, but smaller state funds may not offer the level of diversification found in larger states. It’s also important to consider the holdings and credit risks of any bond fund, including those dedicated to a specific state. For example, in October 2017, many state funds still held Puerto Rico bonds, which are generally exempt from state income tax but carry high credit risk.9
If a bond was issued by a municipality outside the state in which you reside, the interest may be subject to state and local income taxes. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest may be subject to the alternative minimum tax.
The return and principal value of bonds and bond fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Investments offering the potential for higher rates of return involve a higher degree of risk.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1, 8) CNBC, February 28, 2018
2) Bloomberg, 2018 (Bloomberg Barclays U.S. Municipal Index for the period 1/1/2018 to 4/16/2018)
3-4, 6) The Bond Buyer, February 12, 2018
5) The New York Times, February 23, 2018
7) Moody’s Investors Service, 2017
9) CNBC, October 10, 2017
Federal Income Tax Returns Due for Most Individuals
The federal income tax filing deadline for most individuals is Tuesday, April 17, 2018. That’s because April 15 falls on a Sunday, and Emancipation Day, a legal holiday in Washington, D.C., falls on Monday, April 16, this year.
Need more time?
If you’re not able to file your federal income tax return by the due date, you can file for an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You should file Form 4868 by the due date of your return. Filing this extension gives you an additional six months (until October 15, 2018) to file your federal income tax return. You can also file for an automatic six-month extension electronically; details on how to do so can be found in the Form 4868 instructions, as well as on the IRS website.
Note: Special rules apply if you’re living outside the country, or serving in the military outside the country, on the regular due date of your federal income tax return.
Pay what you owe
One of the biggest mistakes you can make is not filing your return because you owe money. If the bottom line on your return shows that you owe tax, file and pay the amount due in full by the due date if at all possible. If you absolutely cannot pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you will limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the unpaid balance (options available may include the ability to enter into an installment agreement).
It’s important to understand that filing for an automatic extension to file your return does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe; you should pay this amount by the April 17 due date. If you don’t, you will owe interest, and you may owe penalties as well. If the IRS believes that your estimate of taxes was not reasonable, it may void your extension.
You should consult with your tax adviser to see if there are any factors in your situation that should be considered before filing an extension.
Still Time to Contribute to an IRA for 2017
There’s still time to make a regular IRA contribution for 2017! You have until your tax return due date (not including extensions) to contribute up to $5,500 for 2017 ($6,500 if you were age 50 by December 31, 2017). For most taxpayers, the contribution deadline for 2017 is April 17, 2018.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit (or, if less, 100% of your earned income). You may also be able to contribute to an IRA for your spouse for 2017, even if your spouse didn’t have any 2017 income.
Traditional IRA
You can contribute to a traditional IRA for 2017 if you had taxable compensation and you were not age 70½ by December 31, 2017. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2017, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.
| 2017 income phaseout ranges for determining deductibility of traditional IRA contributions: | ||
| 1. Covered by an employer-sponsored plan and filing as: | Your IRA deduction is reduced if your MAGI is: | Your IRA deduction is eliminated if your MAGI is: |
| Single/Head of household | $62,000 to $72,000 | $72,000 or more |
| Married filing jointly | $99,000 to $119,000 | $119,000 or more |
| Married filing separately | $0 to $10,000 | $10,000 or more |
| 2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan | $186,000 to $196,000 | $196,000 or more |
Roth IRA
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older). For 2017, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $118,000 or less. Your maximum contribution is phased out if your income is between $118,000 and $133,000, and you can’t contribute at all if your income is $133,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $186,000 or less. Your contribution is phased out if your income is between $186,000 and $196,000, and you can’t contribute at all if your income is $196,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
| 2017 income phaseout ranges for determining ability to contribute to a Roth IRA: | ||
| Your ability to contribute to a Roth IRA is reduced if your MAGI is: | Your ability to contribute to a Roth IRA is eliminated if your MAGI is: | |
| Single/Head of household | $118,000 to $133,000 | $133,000 or more |
| Married filing jointly | $186,000 to $196,000 | $196,000 or more |
| Married filing separately | $0 to $10,000 | $10,000 or more |
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion. (This is sometimes called a “back-door” Roth IRA.)
Finally, keep in mind that if you make a contribution to a Roth IRA for 2017 — no matter how small — by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2017.
You should consult with your own advisor to see if there are other considerations or factors that you should consider before making contributions to any IRA.
2018 Standard Mileage Rates
The IRS has announced the 2018 optional standard mileage rates for computing the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes.
Effective January 1, 2018, the standard mileage rates are as follows:
– Business use of auto: 54.5 cents per mile may be deducted if an auto is used for business purposes
– Charitable use of auto: 14 cents per mile may be deducted if an auto is used to provide services to a charitable organization
– Medical use of auto: 18 cents per mile may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons)
– Moving expense: 18 cents per mile may be deducted if an auto is used to move to a new home in connection with the start of work at a new job location
You can read IRS Notice 2018-03 here.
2017 Year-End Charitable Giving
There still is time for 2017 tax planning. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
Example(s): Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).
A word of caution
Be sure to deal with recognized charities and be wary of charities with similar sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, telephone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Exempt Organizations Select Check search tool. And don’t send cash; contribute by check or credit card.
Tax deduction for charitable gifts
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50% of your AGI for the year, and other gifts to charity may be limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. Your overall itemized deductions may also be limited based on your AGI.
Make sure you retain proper substantiation of your charitable contribution for your deduction. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
Year-end tax planning
When making charitable gifts at the end of a year, it is generally useful to include them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.
For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.
The existence of tax changes or what they would be is unknown at this time. You may want to consider if the proposed increase in the standard deduction eliminates the tax benefit of itemizing your deductions. You may want to consider making your 2018 contributions in 2017 if you think the that change will be made in 2018.
