2018 is the first year we are all filing our tax returns under the new Tax Cuts and Jobs Act. There are plenty of you who may have experienced a clear tax break, but for those of you who live in high-tax states like myself, the $10,000 cap on deducting State and Local Taxes (SALT) may have hit you harder than expected.
There is still time to lower your tax bill, assuming you haven’t filed your tax return yet, if you wound up owing more than anticipated. Even though we’re already in 2019, it is still possible to make contributions to certain types of retirement accounts for 2018 right up until the April 15th tax deadline. All you have to do is let your custodian know what year you want your funds applied to.
This is beneficial because even with many Americans finding themselves in a lower tax bracket, small business owners being eligible for the 20% business income deduction, the child care credit being doubled and the increased income threshold for qualifying for it, some of you may still be staring at a higher than expected tax bill for 2018.
Here is what you can do to lower your 2018 tax bill before the tax deadline.
Contribute to a Traditional IRA
You can make a contribution to a traditional IRA to lower your taxable income potentially. You may be eligible for this option if your employer doesn’t offer a qualified plan such as a 401(k), and if your adjusted gross income (married) is less than $121,000 (though allowable contribution amounts begin to phase out at $101,000 of income, so check with your CPA or custodian). The contribution limit for 2018 is $5,500, or $6,500 if you are over age 50.
Contribute to Your SEP IRA
If you are a business owner with a SEP IRA, you can fund up to $55,000 or 25% of your net business income (whichever comes first) to your SEP IRA in 2018. If you haven’t been prioritizing your retirement savings throughout the year, now is an excellent time to invest in your future and lower your tax bill at the same time.
Be sure to discuss this with your CPA since how much you contribute is limited to your business income, but your taxable business income is lowered by how much you contribute as well as the new 20% business income deduction. And remember, if you have employees, whatever percentage you contribute to yourself you must also contribute to your employees.
Contribute to Your Roth IRA
While contributing to a Roth IRA will not actually lower your 2018 taxes, it will lower your taxes in future years. If you qualify to make Roth IRA contributions, now is a great time to do it.
401(k)s and Traditional IRAs offer tax benefits in the year you contribute, then your contributions grow completely tax free, and you pay Ordinary Income tax rates on the amounts you distribute. Roth IRAs are reversed. Contributions are subject to tax, amounts grow completely tax free, and you never pay income tax on any distributions! And, Roth IRA balances are not subject to Required Minimum Distributions after you reach age 70 and a half, like their traditional counterparts are.
Deduct Your Qualified Medical Expenses
If you had any costly medical expenses in 2018, add up all the expenses and check to see if you can deduct them. If they push you over the standard deduction limits, itemizing your deductions on your tax return with your qualified medical expenses could potentially lower your tax bill.
As with any tax and financial moves, I encourage you to reach out to your CPA and financial advisor before taking action so that these potential tax-saving steps can be assessed within your personal situation. I’ll be in touch again in a few weeks to share ways you can start preparing for your 2019 tax bill now!