Filing Family Tax Returns: Tax Planning Tips
Filing the family tax return is not something anyone looks forward to. Even if you are expecting a refund, you need to gather documents, understand new laws and collect all those nagging donation receipts and major purchase receipts. To make sure you are on track when filing your taxes for last year, here is a 2018 tax law changes summary.
2018 Tax Law Changes Summary
The Tax Cut and Jobs Act of 2017 set new tax laws effective January 1, 2018. Everyone needs to spend a few minutes, if they haven’t already, understanding how the new tax laws affect them. Income tax brackets changed, standard deductions increased, certain credit limits increased, and some deductions were changed.
Income Tax Bracket Changes
You have probably already had some exposure to the income tax bracket change with your regular paycheck. The previous tax brackets based on income and filing status were: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The Tax Cut and Jobs Act of 2017 all but two of the tax brackets:
This means that tax payers in five categories saw an increase in their paychecks. The thresholds are contingent on whether you are filing as a single person or married couple. Take a look at the full chart here.
Standard Deduction Increase
For families that don’t have a lot of itemized deductions, they can take advantage of the higher standard deduction. The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction for single filers and married couples filing jointly.
The single filer standard deduction in 2017 was $6,350. The new 2018 single filer standard deduction is $12,000. This keeps many single filers from having to find those donation receipts.
Married couples filing jointly were able to claim a standard deduction of $12,700 in 2017. When filing the 2018 tax returns, this deduction jumps to $24,000. While 30% of married couples filing joint returns itemized deductions, the IRS expects a far smaller number in 2018 because of this increase.
If you are the Head of Household filing your tax return, your standard deduction just increased to $18,000. This is up from $9,350 in 2017. Head of Household filing status often falls between the married and single filing status.
Elimination of Personal Exemptions
Once of the key things to remember with the increase of the standard deduction is the elimination of the personal exemption. Where you normally claimed $4,050 for yourself and each dependent to offset income, this has been removed in lieu of the increased standard deduction.
Child Tax Credit
Many families with children will benefit from an increased Child Tax Credit. It doubled from $1,000 to $2,000. This credit was never 100% refundable, meaning you could go beyond a zero-tax liability and still get credited in a refund. Part of it is refundable and this portion grew from to $1,400.
An addition to this credit is the non-children dependent credit families can claim. If you have a dependent that isn’t a child, you can claim a $500 non-refundable credit. This might include an adult disabled relative or aging parent.
There are income thresholds for these credits starting at $200,000 for single filers and $400,000 for married filing jointly. Phaseouts for the credit start at these threshold values and reduce with increased income.
Earned Income Credit
The Earned Income Credit (EIC) is for low-income families with dependents. You qualify for the credit if they meet the income threshold. The threshold is higher if you have qualifying children.
Changes to Common Deductions
State and Local Taxes Capped
On federal tax returns, deducting state and local income taxes had always been fully deductible with no cap. The Tax Payer and Jobs Act of 2017 changes this, limiting the deductions on federal returns to $10,000.
Many homeowners in states and counties with high home values and property taxes tried to pre-pay the taxes to get the deduction in 2017. Unfortunately, most found out that unless they were billed for the taxes, the pre-payment would not be valid. The rationale was that if you hadn’t been billed, you couldn’t estimate the payment since factors could change what was owed.
Mortgage Interest Deductions Reduced
Home equity loan interest is no longer deductible on federal tax returns. Additionally, taxpayers who purchased a home in 2018 saw a reduction in the mortgage interest they could deduct. It was previously based on a mortgage debt of $1 million but that dropped to $750,000.
Affordable Care Act Penalty
The penalty associated for not carrying health care as directed by the Affordable Care Act was eliminated. This means that those electing to not purchase healthcare during 2018 will not pay the penalty.
Tax Planning and The Family Budget
Getting ready to file taxes is a great time to sit down and assess the family budget. Not only do you need to consider if you are paying taxes or getting a refund, you need to consider what your plan is moving forward. Review your employer elections for your paychecks and make sure you are having the right amount withheld from your paycheck.
Review Retirement Planning
While you consider your taxes and looking at expenses, you should take the time to meet with your financial advisor and review your retirement plan. This might happen during tax season or right after depending on how busy everyone is. But use this period as a reminder to look at your current situation and how it plays into your long-term goals for retirement.
If you are making more money this year compared to last year or even five years ago, you’ll want to assess if you are saving the right amount. Many people get promoted and never change their monthly withholding for retirement plans. If you can afford to increase it, do so up to the amount your budget can handle or the limit of the plan. It is also possible to add funds to IRA accounts with your IRS tax refund. This increases the savings you have set for the perfect retirement.
When looking at the numbers, assess the investments. Perhaps reallocate the investments. You could have chosen a mixed portfolio with specific percentage allocations. For example, you could have said I want 50% in blue chip mutual funds, 30% in technology funds, and 20% in new innovations. If the technology fund did really well, it could potentially be 50% of your portfolio now. This needs to be reallocated to meet your investment objectives and risk tolerance.
Lock in gains and reset the portfolio balance.
Review College Planning
If you still have kids in the house, you are probably still gearing up for college planning. When thinking about college plans, you really need to do more than just set a savings plan. Think about where the funds go, how they are invested and how much you will really need. Some college savings plans exclude you from some financial aid until those funds are exhausted.
A little work around…
You can use your retirement funds without penalty to help fund a college education. That also means that if you have a child who is working, you can fund a Roth IRA up to $5,500 for them (the IRS doesn’t care if the money came from their earnings as longs as they had the earnings to match the contribution). A Roth IRA held for 5 years is tax free to take out for education purposes.
It’s something to think about along with those College 529 plans, Coverdell’s and custodial accounts. A lot of people look at permanent life insurance to fund college as well. Both IRA funds and life insurance are not considered assets listed in FISA application for financial aid.
Make Changes to Monthly Budget
Tax time often reminds us that we have misused our money in some way. For some of us, it is all those non-deductible Caramel Macchiatos at Starbucks. Look at where your money is really going and whether or not that still meets you financial goals.
I love movies and love bingeing movie nights at home. Having a comprehensive cable plan seemed like the smart thing (ten years ago). I never changed it. Going to a streaming platform helped me save $700 annually. That’s money that can go to a bunch of places.
Re-budgeting isn’t about taking away all the things you love. It’s about reassessing what you do and what you once did and see if they still work. Make changes where appropriate and in line with your overall goals.
If you have questions or need help with long-term planning, we are here to help. Send us a message or drop a note in the comments so we can help you make the best plans for your future.
We can’t change the tax laws and they will always change. All we can do is maximize how we benefit from them each and every year. Your future is worth a detailed analysis.