6 Ways to Avoid another Tax Bill in 2019 by Jeffrey M. Mutnik, CPA/PFS
If you are one of the millions of taxpayers who received a smaller-than-expected tax refund or a surprise tax bill after filing your federal income tax returns for 2018, you can take comfort in knowing you are not alone. If you do not want to end 2019 in a similarly disappointing financial position or worse, now is the time for you to take action and maximize your tax efficiency for the remainder of this year.
First the facts: According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA), that went into effect beginning in 2018 did provide the majority of taxpayers with an average tax cut of $800 in the form of higher take-home pay. In addition, the IRS reported that the average refund check it issued as of April 19, 2019, was $2,725, down just 2 percent, or $25 from last year. Yet, when it came time to file their federal returns, many taxpayers forgot about the additional take-home pay they enjoyed during the year and instead focused on the smaller refund they received as compared to prior years. As good as it may feel to get a refund back from the government, doing so may mean you are missing out of other tax saving opportunities.
Following are six smart moves to make after filing your taxes for 2018.
Check your Current Paycheck Withholding
In general, taxpayers owe the government money when they do not pay their fair share of taxes during the year, either through quarterly estimated tax payments or by having the correct amount of taxes withheld from their wages by their employers. In contrast, taxpayers who overpay their tax liabilities during a year can end up with a refund from the government. The key to paying the appropriate amount of tax depends on the information taxpayers provide on Form W-4.
For 2018, a significant number of taxpayers received larger paychecks and smaller refunds due to a combination of factors in which the number of allowances on employees W-4 forms were not updated and aligned with the IRS’s new withholding tables that reflected the TCJA’s lower tax rates, limits to itemized deductions and loss of certain exemptions under the TCJA. In many cases, taxpayers ended up owing the government money even though their overall tax liabilities were reduced.
To avoid this problem in the future, it is important that you check their withholding against the number of allowances you claim on form W-4. The fewer allowances, the more money your employer will withhold for taxes, and the less likely you will end up with a tax bill. Under certain circumstances, it may be beneficial for you to increase your withholdings by a certain dollar amount for each pay period in order to limit your risks of receiving a tax bill at the end of the year.
While the IRS offers taxpayers the ability to check their withholding using its online calculator, be forewarned that this tool is complicated and requires users to know and understand complex tax matters. Instead, consider meeting with your accountant to provide you with a paycheck withholding checkup and provide you with the answers you need to accurately complete a new W-4 and to implement other strategies to maximize your tax efficiency.
Increase or Start Making Quarterly Estimated Tax Payments
If your withholding does not accurately represent your expected tax obligation for the year, or if you are self-employed or work a part-time job for which taxes are not withheld from your pay, you may need to make quarterly estimated tax payments to make up the difference between what you paid during the year and your actual tax liabilities come April 15.
Save for Retirement
Whether you are a few years or a few decades from retirement, it’s never too early to start planning. Contributions to 401(k) retirement plans can reduce your taxable income in the year of contribution, and the money you save will continue to grow tax-free until you begin taking withdrawals to fund your golden years. For 2018, the maximum amount you may contribute to these plans via salary deferral is $19,000, or $25,000 if you are age 50 or older.
If you don’t have access to an employer-sponsored retirement savings plan, you may qualify to set up an individual retirement account (IRA) for yourself and/or your spouse. The maximum amount you may contribute to a traditional IRA or Roth IRA for 2018 is $6,000, or $7,000 if you are age 50 or older. The type of IRA you are eligible to set up will depend on your filing status and annual income.
Share Your Wealth
The new tax law and its very generous estate tax exemption reduces the number of taxpayers who will be subject to federal estate and transfer taxes, at least through the end of 2025, when the exemption will be cut in half and return to its pre-TCJA levels. For 2019, individual taxpayers may transfer up to $11.4 million in assets to their heirs during life or at death without incurring federal estate or gift taxes, or $22.8 million for married couples. On the other hand, not all states follow federal laws, and some of those that do not have hefty estate taxes. If you live in one of these states, you should consider employing one of many strategies to remove assets and their related tax liabilities from your estate.
For example, the tax law allows individuals to annually give gifts of $15,000 or less to as many people as you wish free of gift taxes. If you are married, the exclusion amount is $30,000. Therefore, if you and your wife have four children, you could give four gifts totaling $120,000 without incurring transfer tax. All gifts to U.S. spouses, no matter the amount, avoid gift taxes as do the education and medical expenses you pay directly to a school or medical provider on behalf of another person. However, if you make a payment directly to a student or another individual, you will trigger gift tax consequences.
Conduct an Estate Plan Checkup
Building and preserving wealth over the long term requires advanced planning and consistent care and attention to ensure that that the plans you made yesterday continue to reflect your needs today and your goals for the future. This involves reviewing your will and the names of your beneficiaries on financial accounts and insurance policies at least once a year, at a minimum. Remember that your personal circumstances will continue to change over your lifetime as will tax and estate laws.
It is critical that you remain vigilant and frequently review the state of your personal and professional affairs. This will enable you to take swift action, as needed, (and possibly implement new strategies and structures) to protect your assets, along with any potential future appreciation in value, while minimizing your exposure to income, capital gains and estate and gift taxes.
No one knows for certain what the future will bring, but the one thing you can count on is that there will be several more rounds of changes to the U.S. tax code during your lifetime. Even today, more than one year after Congress passed the TCJA overhauling the tax code, taxpayers are still awaiting IRS guidance to help them comply with the law. Working with experienced advisors and accountants can help you stay up-to-date on recent changes to the law, interpret it appropriately and provide you with sound strategies that will serve you well now and into the future.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.