5 Questions to Ask a Tax Expert Now
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It may be the holiday season, but it's also time to start thinking about your taxes.
Through the end of November, TurboTax is offering free, 15-minute tax consultations to help taxpayers understand how the new tax law affects their finances and ways you can still save money. You can do the consult by phone or one-way video chat with the company's own CPAs and enrolled agents—that is, experts in federal and state income tax preparation.
The Internal Revenue Service also has a "Get Ready" page for tax planning, and just issued Publication 5307, Tax Reform Basics for Individuals and Families, with more information.
Whether you take advantage of the TurboTax offer or talk to your own tax expert prior to year-end, here are five questions to ask now to ensure you get back as much as possible next tax season, or pay as little as possible if it turns out you owe.
Are You Withholding the Right Amount?
The new law dropped tax rates for most Americans and eliminated the personal exemption but roughly doubled the standard deduction.
For that reason, it's crucial to check your withholding to make sure that your employer has been taking out the right amount each pay period so you're not underwithholding or overwithholding.
"It’s not easy or intuitive to figure out what it all means to your bottom line," notes Dustin Stamper, managing director in the Washington, D.C., tax office of Grant Thornton, the accounting firm. "There’s no substitute for actually running the numbers."
Stamper notes that wage-earners who find they've been underwithholding can ask their employers to withhold more in December so they don't end up with a big tax bill or even a penalty.
Those who work for themselves and pay quarterly estimated taxes can increase their January payment, which covers fourth-quarter 2018. But they still may be liable for some penalites.
"Bumping up your last quarterly estimated tax payment can still expose you to penalties for underpayments in previous quarters," Stamper says.
Should You Still Itemize for 2018?
The standard deduction nearly doubled for 2018, to $12,000 for singer filers (up from $6,350), and to $24,000 for married couples filing jointly (up from $12,700).
An estimated 29 million people who itemized in the past are likely to file using the standard deduction for 2018, says the Tax Foundation, an independent tax policy research organization based in Washington, D.C. That means 90 percent of Americans will now use the standard deduction, up from about 70 percent in 2017.
If you've itemized in the past, knowing now which way you'll be filing for 2018—and in subsequent years—can save you money in taxes.
"It’s critical to know whether you expect to take the standard deduction before making decisions on year-end spending on things that generate itemized deductions," Stamper says.
If you don't itemize, you will no longer be able to deduct charitable gifts, for example. There's also a $10,000 limit on the deductibility of state and local taxes, which could make that deduction worthless to many taxpayers.
But a tax expert can tell you whether it makes sense to "bunch" deductions in alternate years—say, contributing twice as much to charity in one year and nothing or very little the next. Using that system, you'd itemize one year and take the standard deduction the next.
What Can You Still Deduct?
Many tax write-offs were eliminated by the new tax law, so if there's a chance you'll still itemize, talk to a pro about what you can still deduct.
If you wrote off unreimbursed employee expenses in the past, you can no longer do so for 2018. If you took out a home-equity line or credit or loan, you can no longer deduct the interest on the portion of that debt that was used for a purpose unrelated to your home—for instance, financing college.
"Taxpayers with an outstanding home equity loan should consider paying it off since interest payments can be costly, and there may no longer be any tax benefits available to offset it," says Joseph Conroy, a certified financial planner at Synergy Financial Group, based in Towson, Md.
On the other hand, if you own a small business—say you sell items through eBay out of your home, drive for Uber, or deliver groceries for Instacart—you can still deduct your business expenses. Under the new law, you also can exclude the first 20 percent of your income from taxation if your income is under certain limits. A tax pro can help you identify all the ways to save.
People with very high medical expenses also get a tax break, but for 2018 only. Under the Tax Cuts and Job Act you can still deduct the portion of unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income. That "floor" is scheduled to return to its original 10 percent in 2019.
That poses tax-saving opportunties for married couples with big medical bills, says Bob Charron, partner and tax practice leader at the accounting firm Friedman LLP, based in New York City.
"If one spouse has high medical expenses and a relatively lower adjusted gross income, filing separately may allow that spouse to exceed the 7.5-percent floor and deduct some medical expenses that wouldn’t be deductible if the couple filed jointly," he explains.
What Year-End Investment Changes Should You Make?
Recent stock-market gyrations may make it more important than ever to talk to a tax professional this year about which investments to sell and which to hold.
Up to $3,000 of taxable losses that exceed taxable gains can be deducted on your 2018 return. You can carry forward additional losses into subsequent tax years.
Rates haven't changed on capital gains and losses under the new tax regime. Neither have the general rules governing how to handle year-end transactions to benefit you tax-wise. But other changes the law has wrought may complicate those decisions or introduce some new opportunites.
For instance, Stamper says, the new tax law introduced generous tax incentives for individuals who invest in "opportunity zone funds," which invest in the development of low-income neighborhoods.
"If you are thinking of selling assets that would generate large capital gains this year, you can defer the gain if you invest an equal
amount in an 'opportunity zone fund' within six months of the sale," Stamper says. "You won’t recognize the gain until the investment is sold, or by Dec. 31, 2026, at the latest."
The funds have other tax advantages, but as with any investment, you'll need to read the prospectus carefully so as not to get in over your head.
Should You Change How You Make Charitable Contributions?
You might want to ask a tax adviser about whether you should set up a donor-advised fund. If you decide to "bunch" your deductions to get the benefits of itemizing in alternate years, using such a fund—a sort of charitable investment account—can be an easy way to make sure your chosen charities still get money from you on a regular basis.
With a donor-advised fund, you put money and appreciated investments in and then take an itemized deduction for 2018 for the full amount you transfer. But you can choose when you want the money disbursed to the qualified charities of your choice. So you double up charitable donations for 2018 and 2020 to qualify for itemizing in those years, but have the money paid out to the charities of your choice in 2019. A major brokerage house like Fidelity, Schwab, or Vanguard will be able to set up a donor-advised fund for you inexpensively.
Aside from the tax benefits, donor-advised funds offer another perk to their owners, says Amy Pirozzolo, Fidelity Charitable’s head of donor engagement. "They allow donors to simplify their recordkeeping as there’s a tax receipt from a single organization to keep track of," she says.
If you’re 70½ or older, ask a tax adviser about donating directly to a charity through your IRA. You donate directly to a charity using all or a portion of your required minimum distribution from your IRA. With this option, you won’t get a deduction, but the distribution isn't counted as part of income. That means you'll pay less tax on your required withdrawals.
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