Around this time last year, it was announced that the Tax Cuts and Jobs Act (Sec. 199A) would be revised, undoubtedly altering tax planning strategies, your personal tax returns and business tax preparation. After all, this was the first significant tax reform the nation had experienced in over 30 years, and it brought new ways for taxpayers to save.
On the heels of the Tax Cuts and Jobs Act, and as the new year approaches, the IRS has published changes to contribution limits for the tax year 2019, reaffirming that change is inevitable. Even more reason why having professional tax planning strategies is necessary to prepare you for the new year and beyond.
Updated Tax Contribution Limits
For the tax year 2019, the cost of living adjustments will affect dollar limitations for pension plans and other retirement-related items:
- Employee contribution limits for 401(k), 403(b) and most 457 plans will increase from $18,500 to $19,000. The catch-up contribution for employees 50 years and older holds steady at $6,000.
- Annual IRA contributions will increase from $5,500 to $6,000. Catch-up contribution limit remains $1,000.
- The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) increases from $275,000 to $280,000.
- The limitation used in the definition of “highly compensated employee” under Section 414(q)(1)(B) increases from $120,000 to $125,000.
- Health Savings Account (HSA) contribution limits increase slightly from $3,450 for an individual to $3,500, and from $6,900 for a family to $7,000. Those 55+ can still contribute an additional $1,000.
With these new contribution limits in mind, many financial planners will tell you to max out your 401(k) and health savings account (HSA) contributions. Doing so will lower your taxable income. One significant benefit of an HSA account is the money withdrawn is tax-free when used for qualifying medical expenses.
2019 Tax Planning Opportunities – What’s New
There are other ways to save on your personal tax return. The newly-revised Child Tax Credit will allow you to earn a tax credit of $2,000 per qualifying child under 17 – that’s a 100% increase over 2018. Income limits on this credit have also been raised significantly from $75,000 for single filers and $110,000 for married filers, to $200,000 and $400,000 respectively. This means many more taxpayers can take advantage of the tax credit.
Plus, a new $500 non-refundable credit has been introduced for qualifying dependents other than younger children, called the Credit for Other Dependents. Children who will be older than 17 at the end of 2018, parents and other relatives would all qualify for this credit.
While not new in 2019, another opportunity: establish a 529 account, which offers tax-deferred growth and a state tax deduction. This type of savings account allows tax-free withdrawals, meaning no income tax is paid on the growth of the account when used for qualified educational expenses.
The Tax Cuts and Jobs Act also provides strong incentives for independent contractors and entrepreneurs, including a deduction for major asset purchases, a 21% maximum corporate tax rate, and a 20% of business income deduction for sole proprietors, partners in partnerships and shareholders in S corporations.
Tips and Tax Planning Strategies
There are several tax planning strategies you can utilize to prepare you for Tax Day and to help avoid costly penalties and interest on both federal and state taxes.
The biggest hassle at tax time is often gathering all the documentation together. Organize your tax documents ahead of time and print out a checklist to keep track of everything you’ll need to complete your tax return.
If you expect a tax refund, electronic filing works best. The IRS processes electronic returns faster than paper ones, so most individuals receive a refund three to six weeks sooner. E-filing also boasts a distinct advantage: the IRS checks your return to make sure it is complete, increasing your chance of filing an accurate return. Less than one percent of returns have errors, compared to 20% of paper returns.
Don’t neglect the home office tax deduction. The eligibility for claiming a home office has been loosened to allow more self-employed filers to claim this tax break. Individuals with no fixed location for their business can still claim a home office deduction if they use space for administrative or management duties.
Social Security Changes
There are also some changes to Social Security program that were recently announced. Beneficiaries are getting a 2.8% cost of living adjustment (COLA), for 2019. For workers, the maximum taxable earnings are increasing and for those who claimed early and still work, you’ll still be able to earn more without a benefit reduction in 2019. For high earners, the maximum possible benefit is also rising.
There are several key changes that the Social Security Administration (Administration) (SSA) announces every year to the program that go into effect January 1, 2019. Here are the changes according to the SSA’s annual fact sheet. (Increased payments actually begin December 31, 2018).
The Best (and Easiest) Tax Tip
Perhaps one of the most critical tax planning strategies is to file on time. Filing a return late can result in a penalty of 4.5% of the tax owed, paid each month the return is past due up to five months (the penalty is capped at 25%). For returns more than 60 days late, you’ll be charged a minimum of $205 or 100% of your unpaid tax, whichever is less. Then, a late-payment penalty may also be applied: of 0.5% of the tax due, per month past due, plus interest.
For those owed a refund, however, penalties do not apply. If for whatever reason you can’t finish your return by the deadline, just be sure to file Form 4868 for a six-month extension. But even then, you still must pay at least 90% of your owed taxes by the April tax deadline to avoid the late payment penalty.
The Bottom Line
Understanding the changes made to tax laws as they happen should be an essential part of your tax planning strategies. A financial planner can help guide you through the process to ensure peace of mind when tax season approaches.
Stableford Capital’s tax services can help prepare you to comply with the changes and maximize the benefits of your personal tax return or business tax preparation – it’s not what you make, it’s what you keep.
Are you ready to discuss personal tax returns or business tax preparation? Contact Stableford today by calling 480.493.2300.