The Tax Cut and Jobs Act, which passed at the end of 2017, may change the way some people approach their tax planning. Now that we’re halfway through the year, it may be a good time to catch up on those “I’ve been meaning to-dos” before year-end. Did the tax legislation impact your finances? Have you been meaning to take a closer look?
Here are five things to review:
1. Revisit your tax withholding. With new tax rates in effect, you may want to double-check your tax withholding and submit a new Form W-4 to your employer. Another reason to check is if you received a tax refund but want to take home more money going forward. The Internal Revenue Service offers a free online calculator. Have your pay stub and most recent tax return handy so you can plug in the most accurate figures.
2. Examine your paycheck. Have you noticed a little more money in your pocket? Your take-home pay may also change if you update your tax withholding. View your pay stub from last year and compare it to a current one. If you are taking home more money, put it to use. You can pay down credit card debt, beef up your rainy day fund, or put it toward your savings goals. You could consider increasing your contribution to your 401(k) plan or fully contribute to an IRA
3. Itemize or take a standard deduction? The legislation nearly doubles the standard deduction for individuals ($12,000) and those married filing jointly ($24,000), while eliminating the personal deduction and capping other popular deductions. There is a good chance more people may benefit from the standard deduction rather than itemizing as they did in the past. To see how you may be affected, check out the Tax Foundation’s 2018 Tax Reform Calculator. You can choose a scenario that may be close to your own, or create a custom scenario. When creating your own scenario, it’s helpful to have your recent tax return on hand.
4. Consider your charitable contributions. A major concern with the tax legislation is that contributions to charities may suffer. If more people benefit from the standard deduction, there is less tax incentive for charitable contributions that were itemized in the past. We give to charities because we are passionate about their causes. We shouldn’t stop supporting them because we may lose a tax incentive–especially if our workplace provides matching funds for charitable giving. Moreover, some people may still be able to benefit from itemizing if they are strategic with their giving by bundling or accelerating donations to push past the standard deduction. Consider the convenience of a donor-advised fund where you can receive that tax benefit now and designate grants at a later date.
5. Explore Roth options. Since marginal income tax brackets are lower for many people, it may be the time to consider Roth retirement accounts. If you’re in a lower tax bracket now and expect to be in a higher tax bracket in the future or in retirement, then getting a tax benefit now with pretax contributions may not be as meaningful as tax-free income in the future through a Roth account. Keep in mind, the new income tax brackets are set to expire after 2025, reverting to 2017 law if Congress takes no action. A Roth IRA has income limits so you may not be eligible to contribute if you meet or exceed certain income thresholds. Some 401(k) plans may offer a Roth option, which doesn’t have income limitations, so check with your employer or retirement plan administrator to see if that option is available.
Time has a way of sneaking up on us. And, if you’re like me, there are still quite a few items on your annual “to-do” list. Midyear is a good time to pause and refocus. Take the time to understand the impact of tax legislation on your finances. I’ve provided five considerations, but there are many more, especially if you’re a business owner or your situation is more complicated. And, don’t forget to consult with your tax advisor if you use one.
This article was written by Judith Ward from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.