It’s probably safe to say no one likes doing their taxes. For those who put off the misery of filing taxes until the absolute last second – this blog is for you! Here are some last minute tax tips to help you take control and understand better how to do your taxes.
Tax Tip # 1 – IRA Contributions
You have until April 15th to make IRA contributions that count for 2018.
Depending on your income you may be entitled to a tax deduction for contributions to a “Traditional” IRA (not Roth IRAs). Use this handy decision tree to figure out whether you can deduct your IRA contributions.
Example: your income is $50,000 and you deposit $5,500 into a Traditional IRA.
Assuming you make the contribution before 4/15/19 (and notify your financial institution that it should be recorded in the 2018 tax year), your income for tax purposes will only be $44,500. To see how much you’ll save on taxes, check the 2018 tax brackets and multiply the contribution by your tax rate. For example, $50,000 of income puts you in the 22% tax bracket (if you’re single).
$5,500 x 22% = $1,210. That’s over $1,000 shaved off your tax bill (and not to mention, you have more money tucked away for retirement)!
Tax Tip # 2 – HSA Contributions
If you have a High Deductible Health Insurance Plan (“HDHP”), you may be eligible to contribute to a “Health Savings Account”, or HSA for short. An HSA is like an IRA, but for health expenses. Just like a Traditional IRA, deposits into an HSA are tax deductible and you have until tax day to make prior-year contributions.
For 2018, you can contribute $3,450 to an HSA if you’re the only one on the insurance plan. If your spouse and/or dependents are covered, too, the max is $6,900. If you’re 55+, add $1,000 to whichever limit applies.
Tax Tip # 3 – Virginia Residents
Virginians were left in limbo following the 2017 federal tax cuts. While we had over a year to prepare for changes to federal tax filing, it was uncertain how (or if) the state of Virginia would respond to the feds.
That is, until a few weeks ago. On February 15th, after round-the-clock debate, the General Assembly finally passed into law updates to the Virginia tax code to (partially) fall in-line with the federal revisions. While it is a relief to finally have guidance, these state-level revisions come as a mixed bag of both bad and good news, in our opinion.
- For 2018 only – state & local tax deductions (real estate, personal property, income, and sales tax) are capped at $10,000 total – same as federal
- Starting in 2019 – if you itemize deductions, these deductions will be capped if you have income over $261,500 (individuals) or $313,800 (married) – different from federal
- For 2018 only – if you owe tax and file before July 1, the state is going to automatically send a refund up to $110 (individuals) or $220 (married). This is the state’s way of compensating citizens for not conforming to new the federal tax law until mid-way through filing season. Checks will be mailed around October.
- Starting in 2019
- if you itemize deductions, you can deduct the actual amount of state & local taxes, assuming your income isn’t greater than the previously mentioned limits (i.e. no more $10,000 cap) – different from federal
- the standard deduction will increase by 50%:
- individuals – $4,500 (up from $3,000)
- married – $9,000 (up from $6,000)
Tax Tip # 4 – Watch out for Fraud
Be vigilant when it comes to suspicious phone calls and emails. The “scam-du-jour” involves fraudsters posing as IRS agents and bullying unsuspecting victims into paying fabricated overdue tax bills under the threat of arrest, litigation, or even deportation if the victim does not comply.
Two things to keep in mind when it comes to taxes and fraudsters:
- A real IRS agent will never call and demand immediate payment. The first way the IRS will contact you is through snail mail. You may be contacted by phone, but only after an official letter is sent. And if they still can’t get in touch with you by that point, you may be the unlucky recipient of an unannounced visit. If the first time you’re hearing from the IRS is by phone call, chances are it’s a fraudster.
- IRS auditors do not have the power to personally arrest you. This is reserved for a special criminal enforcement division of the IRS. The IRS does not immediately jump to arrest being the first course of action; should you be in a position where you could be arrested for tax crimes, you would have received many notices from the IRS beforehand (see #1 above).
Tax Tip # 5 – Adjust Paycheck Withholdings
Hot take – huge refunds are not the best thing since sliced bread.
Would I like to take a newfound, thousand-dollar-plus cash infusion down to the La-Z-Boy outlet and splurge on the leather recliner of my dreams? You bet.
But something I like more than a one-time shopping spree is having more money in my paychecks (which I can then use to save or invest, and eventually buy said chair guilt-free).
This leads us to our last last minute tax tip – adjusting your paycheck withholdings. This is one of the trade-offs when it comes to taxes: would you rather have one large windfall each April, or a little more cash in each paycheck throughout the year? If you receive a large refund each April, two things are happening behind the scenes which you might not realize:
- You are giving the government an interest-free loan
- Each paycheck you are artificially making yourself poorer than is necessary
If this has piqued your interest, but you don’t know where to start – have no fear, taking action is easy. First, ask your employer how many “withholdings” are on your W-4. A W-4 is that annoying form you had to fill out the first week on the job – you know, the one with all those pesky “0s” and “1s”. If you’d like to learn more, here’s an in-depth explanation from TurboTax.
The important thing to know is that withholdings and taxes work like a see-saw: The more withholdings on your W-4, the less tax taken off your paychecks. And vice versa – the fewer withholdings, the more tax taken off your paychecks. In general – the more tax “artificially” withheld from your paychecks (i.e. too many withholdings on your W-4), the greater your refund.
So if you want to make a change, the next step is to ask HR or your benefits department for a new W-4. Use a smaller withholding number this time; the calculation is complicated, but thankfully you don’t even have to crunch numbers yourself – here is a handy calculator.
Keep in mind, the issue of a large refund versus larger paychecks is a matter of personal preference. If you’re worried you won’t handle that monthly extra cash prudently, you may be better off sticking with a large annual refund (so long as you trust yourself enough to earmark part of it for savings if need be – if not, we have bigger problems!). The takeaway is that you should decide what works best for your budget, and then make an informed decision either way.
We’re in the home stretch, folks! Take these last minute tax tips and leave Tax Man in the dust. We hope you find these tips useful.
Call today if you’d like to review your tax strategy in more detail!
Taylor Hoffman is an SEC registered investment adviser with its principal place of business in the State of Virginia. Any references to the terms “registered investment adviser” or “registered,” do not imply that Taylor Hoffman or any person associated with Taylor Hoffman have achieved a certain level of skill or training. Taylor Hoffman may only transact business in those states in which it is registered /notice filed, or qualifies for an exemption or exclusion from registration /notice filing requirements. For information pertaining to the registration status of Taylor Hoffman or for additional information about Taylor Hoffman, including fees and services, please visit www.adviserinfo.sec.gov.
The information contained herein is provided for informational purposes, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice. Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.
This document contains information derived from third party sources. Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.
Taylor Hoffman is not a Public Accounting firm, and the information contained herein should not be construed as tax advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their tax advisor for more specifics.
Taylor Hoffman is not a law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their attorney for more specifics.