Taxes – you can’t avoid them, but you can make the annual ritual a little less, well, “taxing” with proper planning and preparation. And you may be able to reduce this year’s burden, as well as become better prepared for any upcoming negotiations. I’ll offer more details next month.
Let’s get started today with an overview.
- Record keeping. Come January, you’ll be receiving your W-2s, 1099s, form 1098 (mortgage interest), itemized lists of donations to charities, and more.
Decide now where you would like to store your records, as they start arriving. Do you do your own taxes every year or does a tax professional prepare your return? Have you always filed jointly- with your part limited to signing on the dotted line? Put the necessary records in an easily accessible location. If you are concerned that the documents may disappear, make copies and store them separately. - Changes in marital status and withholdings. Whether you are getting married or are going through a divorce, a change in marital status can have a significant impact on your tax liability.
When these changes take place, you may need to complete a new W-4 form with your employer. If you are self-employed, an adjustment in quarterly payments may be in order.
Discuss this with your CDFA, for more detailed and personalized recommendations.
If possible, it’s best to avoid the need to write a big check to the IRS that triggers an
underpayment penalty. While some folks enjoy getting a big refund each year, the April windfall comes in the cost of an interest-free loan to the government. - Maximize retirement contributions. If you participate in an employer-sponsored plan, let’s see if you can contribute the maximum amount. If there is an employer match- make the minimum contribution, at least! By not participating in any portion of the employer match, you are passing up a free gift–a gift that will pay dividends via long-term appreciation.
- Charitable donations. The standard deduction has been raised and fewer folks will benefit from itemizing. Still, many find satisfaction in donating cash to their favorite causes even if a tax benefit is not forthcoming.
Many charities gladly take non-cash donations. It’s a great way to clean out the closet and have someone less fortunate benefit from those things you don’t want to see ever again. If the value of all non-cash donations exceeds $500, you need to complete Form 8283 (IRS: About Form 8283, Non-cash Charitable Contributions), so get the receipts from your charity (Good Will, Salvation Army, your religious organization, etc.). - Health care coverage. Tax reform eliminated the penalty for failing to have health
insurance, but the individual shared responsibility provision was eliminated for tax year 2019- not 2018. If you or family members do not have the minimum essential coverage, you may be subject to a penalty when you file for 2018. Health care coverage is an essential issue to discuss in any negotiations. - Health savings accounts. If you or your spouse have a Health Savings Account (HSA) eligible plan, up to $6,900 can be contributed for your family; self-only coverage is $3,450 (IRS: 2018 HSA contribution limit for individuals with family HDHP coverage).
Contributions can help lower taxable income, and it’s a savings account that’s available to assist for qualified medical expenses. Any balance in this account can be saved from year-to-year- and is also considered ‘marital property’ subject to division.
This is not an all-inclusive list, and you may not have had any significant changes in your
financial situation this year. Getting an early start can prevent the troubles that always seem to surface in April. Having this information at hand can also help you negotiate more confidently.
As with any tax situation, feel free to contact your tax advisor.
