By now, you are likely either done with or are nearing completion of your initial income tax return under the new tax law, informally known as the Tax Cuts and Jobs Act (TCJA). Signed into law by President Donald Trump on December 22, 2017, the new rules, which went into effect on January 1, 2018, were the most significant overhaul of the U.S. tax code in more than 30 years. Now that you’ve seen the effect of the new law on your personal return, you may be interested in looking at ways to improve your situation next year. Here are some steps you can take now that may provide some benefit when you file your next return.
- Check your payroll withholding – In light of the many changes from the TCJA, the U.S. Department of the Treasury and IRS issued new withholding tables in 2018. Those tables indicate to employers the proper amount to deduct from an employee’s paycheck for income tax. Despite frequent reminders to do so throughout 2018, individuals who didn’t review their withholdings last year likely had too little taken out of their paychecks, leading to smaller refunds or unexpected tax due. Failure to pay in at least 90 percent of what the taxpayer owed for 2018 or 100 percent of the tax liability from 2017 (110 percent for those with adjusted gross incomes greater than $150,000) would normally trigger penalties for underpayment. However, the IRS said in January that it would waive the penalty for those taxpayers that paid in at least 85 percent of their tax liability for 2018. Requesting and completing a new Form W-4 from your employer will help you avoid this penalty next year.
- Take advantage of pretax deferrals – In addition to deferring a portion of your salary pretax to your company’s 401(k), consider making the maximum contribution to a Health Savings Account (HSA) on a pretax basis. To do so, however, you must first be covered by a qualified high-deductible health plan (HDHP). Funds held in the HSA can accumulate over time and can even be invested. The HSA can be used tax-free for qualified health care expenses. At age 65, you can make withdrawals for any reason by paying ordinary income tax rates on the distribution. The 2019 contribution limitation for an individual with self-only coverage is $3,500. For an individual with family coverage the limitation is $7,000. Those who are age 55 and older can do an additional catch-up contribution of $1,000.
- If you’re a business owner or real estate investor using a pass-through entity structure, familiarize yourself with the new Section 199A deduction or speak with your tax preparer about this rule. In general, this (temporary) provision allows for a 20 percent deduction of a business owner’s share of qualified business income (QBI), subject to an overall limitation based on 20 percent of taxable income less net capital gain, as well as a potential W-2 wage limitation and/or an unadjusted basis of qualified property limitation for taxpayers exceeding certain taxable income thresholds. QBI is the owner’s share of pass-through entity income connected to a qualified trade or business within the U.S. or Puerto Rico as reported on the owner’s Schedule K-1 as well as qualified trade or business income from a business operated as a sole proprietorship. It does not include W-2 compensation, guaranteed payments or certain investment income. The provision was enacted to help provide tax relief to businesses that did not operate as C corporations, as under the TCJA the corporate tax rates were significantly reduced from graduated rates with a top rate of 35 percent to a flat rate of 21 percent. Single taxpayers with taxable income less than $157,500 and joint taxpayers with taxable income less than $315,000 receive the full amount of their deduction (subject to the overall taxable income limitation). If the taxpayer’s taxable income exceeds $207,500 (for single filers) or $415,000 (joint filer), the 20 percent deduction may not be available after the other limitations noted above are applied. Taxpayers with taxable income in between these limits may receive a partial deduction. The definition of a qualified trade or business does not include specified service trades or businesses (SSTB). SSTBs are trades or businesses involving the performance of services in the fields of health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing or any other trade or business that relies on the reputation or skill of one or more of its employees. Taxpayers with taxable incomes below the threshold amount ($157,500 for single taxpayers and $315,000 for joint taxpayers) with trades or businesses that are SSTBs are not subject to this exception.
Looking into one or more of these suggestions in 2019 can help you take advantage of the new tax reform law.