Spring is in the air: hamburgers sizzling on the grill, fresh grass sprouting in the yard, the pang of anxiety when you realize you haven’t done your taxes yet….
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 tips to make the experience (somewhat) less painful and to help you understand your options.
1. Don’t Forget Those 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).
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)!
2. …and 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.
3. Virginia Residents – Listen Up
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)
To view a full list of changes visit the Virginia Society of CPAs website.
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:
- 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).
5. Taking the “fun” out of Refund
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 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! Just a few more days until you can leave the 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!
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