With April 15 fast approaching, we are getting down to the wire on taking steps to potentially reduce your tax bill. As I mentioned in the column a couple of weeks ago, almost immediately following the Tax Reform and Jobs Act of 2017, the government immediately adjusted tax withholding tables in an effort to make the effects of the tax reduction immediately felt in paychecks.
Unfortunately, it appears as if the tax withholding calculations may not have been accurate for some taxpayers, and even though overall tax bills may have been reduced, some people accustomed to getting tax refunds are getting either smaller refunds or even owing when they file their returns.
While the tax ship for 2018 has mostly sailed, there are a few things left to do that might take the edge off the tax bill.
If eligible, a deductible IRA contribution for tax year 2018 can be made up to April 15 of 2019. To be eligible to deduct some or all of an IRA contribution, you must not be eligible to participate in an employer-sponsored retirement plan.
If you or your spouse are eligible to participate in an employer-sponsored plan, then the deductibility of your IRA contribution is limited by income. While I don’t have the space in this column to go through the complete phase-out process, once AGI reaches $189,000 for a married couple filing jointly, the deductibility is eliminated. The maximum deductible IRA contribution of 2018 is $5,500 per individual, for those over 50 this amount is raised to $6,500.
Another potential tax deduction that gives you until April 15 to take advantage of is contributions to a Health Savings Account, or HSA. An HSA is a special type of tax advantaged account offered through an employer health plan or attached to a qualifying high-deductible individual health insurance plan.
If you participate in a qualifying health plan, you can contribute as much as $3,450 to an HSA in 2018 if you have individual health coverage, or $6,850 if you have a family health plan. If you're 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
HSAs are able to accumulate a balance over time, and can be invested when appropriate. A really great feature of the HSA is it can also be withdrawn for eligible medical expense tax-free as well, making these accounts the only plan I know of that allows both tax deductible contributions and tax-free withdrawals.
The Tax Reform and Jobs Act was not simply a tax cut. The law actually redesigned much of the individual tax process, making 2018 a particularly important tax year. Because of these major changes this filing season, it's important to review both your deductions and any new tax credits for which you may be eligible.
The new rules expanded the child tax credit, but other popular credits include the Child and Dependent Care Credit, the Savers Credit to help lower-income families to save for retirement, the American Opportunity Credit and Lifetime Learning Credit for families of college-aged children.
It is important to note that I do not offer tax services, and while I know taxes for many means simply gathering papers and dropping them off at a preparer’s office, this is definitely the year to ask more questions and do more research.
Much has changed on the tax return front and utilizing the tax system to our greatest advantage is almost an American obligation. So let’s sharpen the pencil and save some money.