Check your withholding
Check your withholding or estimated taxes. The overhaul, followed by automatic changes to paycheck withholding in 2018, brought bad refund surprises to many filers last spring.
As it turned out, overall refunds changed little. For both 2017 and 2018, about three-quarters of filers received refunds, which averaged $2,800. But these results conceal wide variations. For 13 million filers earning between $100,000 and $250,000, average 2018 refunds dropped 11% compared with 2017, according to mid-July data from the Internal Revenue Service.
This shift got the attention of the IRS, which has since improved its withholding calculator. Employees and retirees can use it to find out what they owe under Uncle Sam’s pay-as-you-earn system and then fine-tune their refunds. Taxpayers who aren’t employees need to use complex worksheets in IRS Publication 505 or talk to a tax preparer.
But the law contains a boon for many employees. Usually they won’t owe penalties if they increase their withholding late in the year—even if it’s for a spouse’s self-employment income, according to an IRS spokesman.
Make your payments.Those with income not covered by employer-paycheck withholding must usually make quarterly payments based on earnings for each period to avoid penalties. Are you behind on payments? The sooner a mistake is corrected, the less damage it does.
Assess itemized deductions
As a result of the 2017 overhaul, more than 25 million taxpayers have switched to claiming the standard deduction rather than itemizing write-offs on Schedule A. The share of returns with Schedule A has dropped to about 10% from about 30%.
For 2019, the standard deduction is $12,200 for single filers and $24,400 for married couples filing jointly.
The most common itemized deductions are for state and local taxes (SALT), charitable donations and mortgage interest. Now that Congress has limited the SALT deduction to $10,000 per return both for single and married joint filers, it’s often easier for singles than couples to benefit from itemizing.
For example, a married couple who deducts the limit of $10,000 of SALT needs more than $14,400 of other deductions to benefit from itemizing for 2019, because their standard deduction is $24,400. But a single filer who deducts $10,000 of SALT only needs other write-offs totaling more than $2,200, because his standard deduction is $12,200.
Filers taking the standard deduction don’t need to save receipts to prove their write-offs.
Evaluate capital gains and losses.
Check up on your positions in taxable accounts.
Investors can use realized capital losses to offset realized capital gains plus $3,000 of ordinary income such as wages, every year. Unused losses can carry forward for future use.
Sometimes it makes sense to sell an underwater investment at a loss before the end of the year, or to take gains if you have realized losses.
Also beware of increases in investment income that could trigger a 3.8% surtax. This levy takes effect at $250,000 of adjusted gross income for most married couples filing jointly and at $200,000 for most single filers.
Review eligibility for the 199A pass-through deduction.
The tax overhaul added a 20% deduction for the net income of many businesses that pass through profits and losses to their owners’ tax returns, including rental real estate. This benefit is often curtailed for owners whose incomes exceed certain limits.
In 2019, the limits are taxable income of $160,725 for single filers and $321,400 for married couples filing jointly.
Business owners whose incomes will exceed these limits can sometimes get below the threshold by making tax-deductible donations to charity or contributing more to tax-deductible retirement plans.
Please call Fred Day 901-800-8357 if you have questions about how these apply to you.