Tax Changes to Note Before It’s Too Late…
It’s your patriotic duty, neigh privilege, to pay your taxes! Yeah, we don’t believe that either. The myth of the “kinder, gentler” IRS has been tossed around for decades now, and President Trump would like to do away with IRS all together.
There are two months left in 2018 and before you know it, April 15, 2019 will be here. Have you started prepping your 2018 tax return?
You might be wondering why I’m giving an almost two months’ notice on taxes but there were some major changes to tax laws this year, and if you’re going to make a difference in what you owe, the last two months of 2018 are crucial. But some of the deductions and tax strategies you used in the past might have changed due to the Tax Cuts and Jobs Act that went into effect this year.
The tax law was not written for the rich; it was written for anyone who is financially educated. There is a tax strategy and advantages gained by investors and entrepreneurs. The talking heads of personal finance only talk of the supposed tax advantages of IRAs and 401(k)s. Discover how that’s not true and how you can set yourself up for success with the right tax strategy.
Let’s start with a refresher on what you need to know with the new tax changes:
1. What is Gone
Almost all miscellaneous deductions were dropped for 2018, it will no longer matter if you accumulate moving expenses for a new job, run up expenses that will not be reimbursed from your employer, or get tax preparation advice or a safety deposit box.
Personal exemptions are also gone, but the standard deduction has doubled (not quite) to $24,000 for couples and $12,000 for individuals.
The marriage penalty is also (mostly) gone. If you’re not familiar, here’s a simplified version of how the marriage penalty works. Let’s say that two single individuals each earned a taxable income of $90,000 per year. Under the old 2018 tax brackets, both of these individuals would fall into the 25% bracket for singles.
However, if they were to get married, their combined income of $180,000 would catapult them into the 28% bracket. Under the new brackets, they would fall into the 24% marginal tax bracket, regardless of whether they got married or not.
In fact, the married filing jointly income thresholds are exactly double the single thresholds for all but the two highest tax brackets in the new tax law. In other words, the marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000.
2. What Has Changed
For people in high tax states, what may be most crucial is that there is now a $10,000 cap on what you can deduct on your federal tax return for everything from property taxes to state income and sales taxes.
Also, if you bought a home in 2018, only mortgage interest on debt up to $750,000 can be deducted. In the past the limit was $1 million and that still applies to previous purchases.
For home equity loans or lines of credit you can no longer deduct interest unless you used the money to buy, build or improve your home. Beware: Even borrowing to pay for college will not be deductible. The new rules apply even if you took out the loan before this year.
Losses from fires and storms are generally no longer deductible, although Mark Luscombe, principal analyst for Wolters Kluwer Tax and Accounting, said to watch for permitted losses from hurricanes through specific designations as “presidential declared disaster areas.”
One good note is that as itemized deductions were slashed, one became better. In the recent past, medical expenses had to exceed 10% of your adjusted gross income to count for most people, but that threshold for 2018 is just 7.5% for everyone. In 2019, the 10% threshold returns.
3. What Has New Impact
Selling stocks, bonds, funds and real estate that have gained value in taxable accounts can increase your taxable income, so trying to alleviate the impact of capital gains remains a smart strategy.
But this year the cutoffs for capital gains rates are no longer in sync with tax brackets, so pay attention to income cutoffs, said Luscombe. For the zero percent capital gains rate, which allows you to sell an investment you have owned for at least a year (a long-term capital gain) without paying tax: Singles can have incomes up to $38,600 and couples up to $77,200.
Once above that, long term capital gains rates jump to 15%, 20% and 23.8%. Yet, investors can reduce—or eliminate—capital gains taxes by selling an investment that has declined in value since it was purchased.
Tim Steffen, director of advanced planning for Baird Private Wealth Management, noted that no investment should be sold for tax reasons alone, but if a person can harness the zero percent rate now and expects higher income in the future, consider selling.
4. What Remains
One of the most critical sets of tax benefits saved in this tax law overhaul are those related to longer-term savings and investments. This includes contributions to Education Savings Accounts (ESAs) and Health Savings Accounts (HSAs). Though most notably it applies to contributions and investments made in 401(k) plans and IRAs.
Depending on which type of account is used, individuals can enjoy immediate reductions to taxable income and decades of tax-deferred gains or tax-free investment gains.
While the stock market and cryptocurrencies may have recently given retirement investors a scare, rolling over to self-directed retirement accounts can help supersize allowable contributions, allow catching up on savings and enable investment in real estate.
These accounts can be used to invest directly in real estate, real estate businesses, private mortgages and mortgage loans notes, partnerships and IRA LLCs or real estate IRAs.
Thinking Differently About Taxes
Perhaps one of the most important things to understand is that taxes can either make you poor or they can make you rich. I prefer to use taxes to make myself rich and doing that tax a different type of mindset.
While it can seem like a pleasant windfall to get a return, the reality is it’s not the best thing. This is an employee tax mindset. Essentially, getting a refund from the IRS means they got a free loan from you. That $2,800 or whatever you get back is your money—money that you overpaid to the government. It’s money they got to use all year, and money you didn’t.
If you’ve been reading my letters for a while, it’s probably no secret to you that the IRS writes the tax code to encourage—and reward—specific behaviors.
When you understand the tax code and know what it rewards you for, you have powerful knowledge that 90% of people in the US don’t possess, and you can use it to make yourself rich.
I don’t know what the upcoming Tax Day brings you, if it’s a time of celebration or frustration, but one thing I do know—if you invest a little bit of time and get educated and put the knowledge you gain to work—you’ll have a Tax Day to remember next year.
Editor, Rich Dad Poor Dad Daily