5 Moves to Reduce Your 2018 Taxes - Michael Smeriglio

5 Moves to Reduce Your 2018 Taxes

Article Published by: consumerreports.org

If you submitted your taxes on time, you’re probably keenly aware of your financial situation and ready to move on. But it may be a good idea to think about taxes a little longer and start figuring out how to reduce them next year.

The Tax Cuts and Job Act that went into effect on Jan. 1 will help many people pocket more of their income thanks to its higher standard deductions and more generous tax brackets. But because it eliminates many itemized deductions, it makes things more complicated for others.

Here are five ways to reduce your 2018 taxes and pave the way for lower taxes in the future.

Review Your Withholdings
Your paycheck should now reflect the new tax law, but that could change the number of withholding allowances you should take. To figure out how many you’ll need, you should consider not just your income but also your spouse’s income and any credits and deductions that you take.

If your household income comes mostly from your paycheck, the IRS’s new withholding calculator can help you estimate how much you should be withholding.

But if you also have income from other sources, such as rental income, investments, or a side business, the calculator won’t work, notes Tim Steffen, director of advanced planning at Baird, a wealth management firm in Milwaukee. In this case, you may want to consult a tax expert.

Increase Your Retirement Fund Contributions
Because your tax bite could be lower in 2018, consider putting after-tax funds into a Roth 401(k) or IRA because there’s less benefit now to making pretax contributions to a tax-deferred account.

But if the loss or reduction of itemized deductions, such as state income and property tax, will cost you more in taxes, consider making bigger pretax contributions to a traditional 401(k) or IRA to reduce your taxable income now, says Steffen.

Appeal Your Property Taxes
Asking for a reduction in your property tax could be worthwhile in parts of the country where taxes exceed the new law’s deduction limit of $10,000 on state and local taxes.

The deadline to file an appeal varies by state and even jurisdiction. New Jersey’s April 1 deadline for 2018 has passed, California’s is July 1, and New York’s varies depending on the municipality. How homes are assessed for taxes also varies by location.

To appeal your property tax, you’ll have to prove that your home’s tax assessment is based on a valuation that is too high. You could pay a professional to do that for you or try to appeal yourself. One method is to identify comparable properties to yours that have sold recently; you can find those on real-estate websites. If the market values are significantly lower than the value used to come up with your tax assessment, you may have a case.

“The best time to appeal your property taxes is when you just bought your home or are about to sell it, because you know what it’s worth,” notes Robert Blau, a principal at the tax appeal law firm Blau and Blau in Springfield, N.J. “Even then it’s not a slam dunk.”

The potential savings can be significant. In New Jersey, where the average home sells for $400,000 or more and property taxes often exceed $10,000, the typical tax rate is about 2 to 3 percent of market value, Blau says. “If you were to prove that your assessment was $50,000 too high, you’d save about $1,000 on your tax bill.”

Plan Your Charitable Spending
Because of the near doubling of the standard deduction, the new tax law has significantly reduced the number of households that need to itemize their taxes.

But if you plan your charitable contributions, you might be able to get enough deductions that it pays to itemize. For example, instead of donating, say, $5,000 every year, try donating $10,000 in one year and nothing in the second year.

If that $10,000 contribution, when added to your other deductions, puts you over the standard deduction limit, you’ll benefit. The next year you don’t donate anything, so you’ll probably take the standard deduction.

While this won’t help you increase your tax savings every year, this “bunching” strategy allows you to save more over time than you would just using the standard deduction every year, Steffen says. And it doesn’t require you to spend more just to reduce your taxable income.

If the charities you donate to depend on your largesse every year, consider setting up a donor-advised fund with an investment company, a fairly simple process with minimal fees, Steffen says.

Your contribution to the fund counts as a charitable donation in the year you make it, but you get to choose when the money is distributed. That allows you to give money every year, even though you’re donating every other year.

Qualify Your Business for a 20% Tax Break
Owners of so-called “pass-through entities”—those who claim their business income on their individual income tax forms—may now be able to exempt 20 percent of that income from federal taxes.

If you make a significant income from your pass-through business, you’ll run into eligibility rules. Professionals like lawyers, accountants, and consultants don’t qualify once their incomes exceed $207,500 for an individual or $405,000 for a married couple filing jointly.

But single filers with total taxable income of less than $157,000 in 2018—and joint filers with taxable income under $315,000—can take advantage of the pass-through tax break regardless of their line of work. That goes for folks with side jobs and home-based businesses as well.

“For many individuals in the gig economy that have an established trade or business, this is very good news,” says Erin Fraser, a tax attorney at Hanson Bridgett, a San Francisco law firm.

The key to maintaining that break as your business grows is to keep your taxable income below those thresholds, says Eric Bronnenkant, a CPA and head of the tax department at Betterment, the online investment company.

For instance, if you already can project your income exceeding the threshold for 2018, increase your pretax retirement contributions to a SEP individual retirement arrangement, an IRA for the self-employed. You could also replace bonds in your portfolio that generate taxable interest with tax-exempt bonds. Be aware, too, of the potential downside of selling appreciated assets that generate capital gains. “While long-term capital gains have a reduced tax rate, the ultimate impact may be higher due to a reduction in your pass-through deduction,” Bronnenkant says.

The new tax law also changed the rules on depreciating and expensing equipment, Fraser notes. Now, if you want to reduce taxable income, you might just go buy some equipment and expense it. “I think you will see a lot more capital investment for flexible taxpayers,” Fraser says.


Michael Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.