It's tax season!
February 2, 2019
Tax season is here and the IRS is now accepting both personal and business returns.
If you didn't get a chance to do some planning last year to reduce your income tax liability there are still a few things you can do to minimize the amount you'll owe.
There are a lot of changes for 2018 since the passing of the Tax Cuts and Jobs Act. The TCJA is the most comprehensive revision of the tax code in decades and one of the main changes that most people are aware of is the new higher standard deduction. For 2018 the standard deduction is now $12,000 for an individual and $24,000 for a married couple filing jointly. This new higher deduction amount means that many people won't be itemizing their deductions for 2018 but there are a few "above-the-line" deductions you can take in addition to the standard deduction. "Above-the-line" deductions are those that reduce your adjusted gross income.
Traditional Individual Retirement Account (IRA)
A contribution to your IRA lets you increase your retirement savings and cut your tax bill simultaneously. The contribution limit is $5,500 ($6,500 if you're 50 or older) for 2018, and if you don't have a retirement plan at work (or your spouse does), each dollar contributed will reduce your taxable income. If you have a retirement plan at work then the reduction might be limited by your income; check with your tax advisor.
You have until your tax-filing due date in April to make a prior year contribution.
Health Savings Account (HSA)
An HAS lets you put pretax dollars away to cover qualified medical expenses.
When used in conjunction with a high-deductible health plan (HDHP) you'll get an above-the-line deduction for contributing to your HSA if you contribute with after-tax money. If you contributed pretax funds through payroll deduction on the job, there will be no write off because it will already be deducted from your taxable income. The maximum contribution for 2018 is $6,900 for a family and $3,450 for an individual. If you're 55 you can add (and deduct) another $1,000 to your contribution.
You can contribute to your HSA until the tax-filing deadline in April.
If you are self-employed, you have to pay both the employer and the employee share of Social Security and Medicare taxes. These taxes equal 15.3 percent of net self-employment income. But you can write off half of what you pay as an adjustment to your income.
Deductions for contributions to a self-directed retirement plan such as a SEP, SIMPLE plan or Solo 401K can dramatically reduce your taxable income.
SEP and Solo 401K contributions can be made up to the personal tax-filing deadline including extensions however, you must formally elect to make an employee deferral contribution by Dec. 31.
Another deduction to reduce your income is the cost of health insurance if you are self-employed. This includes coverage for your family. Included are Medicare premiums and supplemental Medicare (Medigap), up to your business' net income. This deduction can't be claimed if you are eligible to be covered under a health plan subsidized either by your employer or your spouse's employer.
Student Loan Interest
A total of $2,500 of student-loan interest for you, your spouse or your dependent can be tax-deductible. For 2018 returns, your modified adjusted gross income must be less than $65,000 if you're single or $135,000 if you are married and file a joint return. The deduction is then phased out above those levels and disappears completely if you earn more than $80,000 if single or $165,000 married and filing a joint return.
This Deduction lets educators write off up to $250 each year for expenses. To qualify, you must teach kindergarten through 12th grade and work at least 900 hours a year on the job. Aides, counselors and principals may also claim this deduction if they have the receipts to back it up.
The best thing you can do is start now. Don't wait until the last minute and then hurry and rush your tax filing. If you have a business or have a situation beyond the norm, get some professional tax advise. The money you spend on a professional could save you thousands of dollars!
Jay Thompson is a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at www.csub.edu/sbdc.