4 Strategies for an Organized Tax Season

Another major change is that many fewer taxpayers are expected to itemize their deductions than in years past. The folks at TurboTax estimate that 90% of filers will benefit more from taking the standard deduction for the 2018 tax year, up from 70% in 2017. The major reason is that standard deduction amounts are going up, to $12,000 for single filers and $24,000 for married couples filing jointly. People who are over age 65 or blind can claim an additional $1,300 as part of their standard deduction; married couples filing jointly can claim an additional $2,600 in their standard deduction ($26,600) if both partners are over 65 or blind. That means that your itemized deductions need to exceed the applicable standard-deduction amount to make itemizing worth your while.

Further reducing the number of people who are apt to benefit from itemizing is the $10,000 cap on the deductibility of state and local taxes, including property taxes. People who live in areas with high state and/or local taxes (sometimes shorthanded as “SALT”), including property taxes, may have easily cleared the standard deduction, even the higher amounts, without the cap. But with the cap on SALT, their itemized deductions may fall below the standard deduction. That’s especially painful for married couples who live in high-tax areas, because the $10,000 cap applies to both single filers and married couples filing jointly.

In other words, single filers with $10,000 in SALT taxes need only find an additional $2,001 in deductible expenses to get over the $12,000 standard-deduction hurdle, whereas married couples filing jointly with high state and local taxes need to identify more than $14,000 in additional deductible expenses for itemizing to be beneficial. On the other hand, many such taxpayers may have been unable to benefit from the SALT tax deduction in the past because they were subject to the alternative minimum tax, which is scaled back under the new tax laws. So the new tax laws are effectively taking with one hand (the SALT cap) but giving with the other (much higher thresholds for AMT-subject income). 

Because so many more taxpayers are apt to claim the standard deduction than itemize, this year’s tax-filing season and the ones that follow could be simpler and smoother than years past. But it’s a mistake to take it too easy in the months leading up to tax time.

After all, you can’t know for sure that you won’t benefit from itemizing until you crunch the numbers. That argues for not waiting until the last minute to work on your 2018 return, as well as for keeping tabs on your deductible expenses for 2019 and beyond. Just because you weren’t an itemizer this year doesn’t automatically mean you won’t itemize in the future. Each tax-filing season necessitates a fresh look.

Moreover, many of your tax-filing chores will remain the same for the 2018 tax year–for example, collecting 1099s from investment providers and documenting taxable capital gains and losses.

As is the case almost every year, tax day–April 15 in 2019–is apt to sneak up in a hurry. Whether you use tax-preparation software or outsource your tax prep to a CPA, here are some key strategies to ensure a smooth and worry-free tax season.

Strategy 1: Use a tax checklist or organizer.
Using some type of a tax checklist or organizer can help you avoid that paper chase and assemble all of the key documents you need in advance; completing your return is then a matter of filling in data. Tax checklists abound online; here’s a basic one from TurboTax.

If you outsource your tax preparation to an accountant, it’s a good bet he or she sends you a tax organizer to work from, either paper or digital; such forms often come prepopulated with your tax data from the previous year. Comparing the current tax year’s numbers to those of the year prior can be a handy way to track trends in your income, interest earned on your investments, and charitable giving, among other items.

Strategy 2: Determine if you’ll be itemizing or taking the standard deduction.
A key next step in gearing up is to determine whether you’ll be itemizing your deductions or taking the standard deduction.

If you employ a CPA to help with your tax return, he or she may have provided some guidance on this issue based on your 2017 return. (Our CPA let us know last year that barring major changes in our financial lives, we’re unlikely to be itemizers for the 2018 tax year–the first time we haven’t itemized in 24 years.)

If you do your taxes on your own, you can probably get a pretty clear view of whether you’ll itemize or use the standard deduction by taking stock of the major deductible items. For most households, the biggest-ticket deductible items include the aforementioned state and local taxes (including property taxes), charitable deductions, home mortgage interest (note the changes in the rules starting in 2018), and medical expenditures in excess of 7.5% of adjusted gross income. (That threshold is going up to 10% of AGI starting with the 2019 tax year.)

Armed with information about whether you’ll itemize or claim the standard deduction, you can then know whether you need to round up supporting documentation. If you’re claiming the standard deduction, you won’t need to bother, but if you’re itemizing, you will.

If you’re aiming to find documentation of your deductible expenses but can’t track down all of the receipts you need, don’t despair. The previous year’s credit card statements, which you can retrieve online, can help you identify expenses you incurred over the past year; if your credit card company prepares an annual accounting of your expenditures organized by category, that can provide an invaluable tool to your deductible expenses. (I thought I had been carefully stashing away receipts and acknowledgments of my charitable donations, for example, but I found that my credit card company had documentation that I was missing.) Healthcare providers and pharmacies are also usually happy to prepare a year-end statement documenting your out-of-pocket outlays over the previous year. 

Strategy 3: Round up your investment documentation.
While the new tax laws affect deductions in a big way, it’s largely business as usual when it comes to the tax treatment of income and capital gains. You may be anxious to get your mitts on your 1099s, which report your investment income. Bear in mind, however, that the deadline for sending out 1099s is a bit later than other forms you might receive, like W-2s; it’s mid-February and even later for some investment providers. (This article takes a closer look at what you can learn from your 1099s.) If you want to get a jump on your taxes but still don’t have all of the documents you need, you may be able to get the information you seek by hopping online with your investment providers; firms typically maintain “tax centers” where you can download and/or print out the relevant forms, including 1099s that haven’t yet arrived or that you’ve mislaid.

Strategy 4: Knock off your contributions as soon as possible.
Your deadline for contributing to an IRA or health savings account is the same as your tax-filing deadline. But that doesn’t mean you need to wait until you get your taxes in to tackle those tasks. In fact, if you want to deduct your health savings account or IRA contribution on your tax return, you’ll need to make that contribution before you file your return. Ditto if you’re taking advantage of the Saver’s Credit. Note that these are deductions are available to you whether you itemize your deductions or not, as discussed here.

Even if you’re not deducting your contribution (you’re making a Roth IRA contribution, for example), there’s an opportunity cost to waiting until the last minute to make these contributions. And those opportunity costs can add up if you’re a serial procrastinator. Assuming you invest in something that goes up more often than it goes down, you’ll lower your return by waiting until your tax-filing deadline each year.

Of course, from a practical standpoint, some investors wait to make those contributions because they want to see what their tax bills are first. If that describes your situation, consider signing on for an automatic-investment program for your future IRA contributions so you’re not at the mercy of your tax bill each year. For 2019 tax year, investors under age 50 can hit their full $6,000 maximum IRA contribution by putting in an even $500 a month; those over 50 can max out with a $583.22 monthly contribution.

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