Some tax-preparation tips can help you lower your taxes. Some help you save time and money when preparing your tax return. Others can help you avoid costly penalties and interest on both federal and state taxes. The goal is to lower your stress while paying less money in taxes.
MAXIMIZE & ITEMIZE DEDUCTIONS*
It’s easier to take the standard deduction, but you may lower your taxes quite a bit if you itemize, especially if you are self-employed, own a home or live in a high-tax area. It’s worth the time and headache if you think your qualified expenses will add up to more than the 2018 standard deduction of $13,000 for married couples filing jointly and $6,500 for single taxpayers and married individuals filing separately. The limitation for itemized deductions to be claimed on 2018 returns begins with incomes of $266,700 or more ($320,000 for married couples filing jointly).*
Common deductions include mortgage interest and charitable donations. You can also deduct the portion of your medical expenses that exceed 7.5 percent of your adjusted gross income for 2017 and 2018. Beginning Jan. 1, 2019, unreimbursed allowable medical care expenses for the year must exceeds 10 percent of your adjusted gross income.*
Home ownership deductions: Homeowners should check to see if they qualify for these money-saving tax deductions, per the new 2018 tax laws*:
- Mortgage Interest: The interest on a new mortgage of up to $750,000 can be deducted. Existing mortgages have been grandfathered in with the old limit of up to a $1 million mortgage.
- Property Tax + State and Local Taxes: Starting this year, you can only take a total deduction or combined limit of $10,000 on property, state and local taxes on your federal return.
- Home Equity Loan Interest: Interest on home equity loans is deductible only if the loan was used for the purpose of improving the residence, effective through the end of 2025, including existing home equity loans.
- Home Sale Gain Exclusion: You are allowed to potentially exclude from federal income tax up to $500,000 of gain from a qualified home sale, if you are married filing jointly.
- Home Office Deduction: If you use a portion of your home exclusively as an office, you can write off a percentage of the expenses based on the square footage of the office compared to the total area of the house.
Contribute the maximum to your retirement accounts: If you haven’t already fully-funded your retirement accounts for 2018, you can do so by April 15, 2019. You have until then to make tax free contributions to a traditional IRA. For 2018, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2018 is $55,000.
AVOID INTEREST & PENALTIES
Make a last-minute estimated tax payment: If you didn’t pay enough to the IRS during the year, you may have a big tax bill, and you might owe significant interest and penalties, on top of taxes.
- You must pay 100% of last year’s tax liability or 90% of this year’s tax or you will owe an underpayment penalty.
- If you make an estimated payment by January 15, you can erase any penalty for the fourth quarter, but you still could owe an underpayment penalty for earlier quarters, if you did not send in any estimated payments then.
- Try not to overpay by too much. It’s better to owe the government a little rather than to expect a refund.
Check IRA distributions: You must start making regular minimum distributions from your traditional IRA by the April 1 following the year in which you reach age 70 ½. Failing to take out enough triggers these penalties:
- A 50 percent excise tax on the amount you should have withdrawn based on your age, your life expectancy, and the amount in the account at the beginning of the year.
- After that, annual withdrawals must be made by December 31 to avoid the penalty.
Provide taxpayer IDs on your tax return: Taxpayer Identification Numbers (usually Social Security Numbers) for you, your children and other dependents must on your return. Otherwise, the IRS will deny any dependent credits that you might be due and delay processing your return. If you are divorced, only one of you can claim your children as dependents. The $2,000 per child tax credit begins to phase out at $400,000 for married couples filing jointly and at $200,000 for heads of households.
File and pay on time: If you can’t finish your return on time, be sure you file Form 4868 by April 15, 2019. This gives you a six-month extension of the filing deadline until October 15, 2019. On the form, you need to make a reasonable estimate of your tax liability for 2018 and pay any balance due with your request. If you file and pay late without an extension, the IRS can charge a late-filing penalty of 4.5 percent per month of the tax owed and a late-payment penalty of 0.5 percent a month of the tax due. The maximum late filing penalty is 22.5 percent, and the late-payment penalty tops out at 25 percent. By filing Form 4868, you stop the clock running on the costly late-filing penalty.
ORGANIZE YOUR RECORDS
It’s not too late to organize what you will need to prepare your tax returns. You may discover some forgotten deductions in the process. Some of the documentation you will need includes last year’s tax return, this year’s W-2s and 1099s, receipts, your children’s Social Security Numbers, and anything related to self-employment income.
Tips to help you get started:
- Print out a tax checklist to help you gather all the tax documents you’ll need to complete your tax return.
- Put in one file all the related tax information that came in the mail in January, such as W-2s, 1099s and mortgage interest statements. Be careful not to throw out any tax-related documents you might need.
- Collect and sort receipts and information that you have kept during the year. Group similar documents together. Having this of information at your fingertips will save you from another search through your files.
- If you don’t know the price you paid for any stocks or funds you have sold, call your broker before you start to prepare your tax return.
- Compile the details on income from rental properties.
- Be sure you have all the tax forms you will need. You can view and download a large catalog of forms and publications at the Internal Revenue Service Web site, or have them sent to you by mail. The IRS also will refer you to a Web site that lists sites where you will find state forms and publications.
GET HELP, IF YOU NEED IT
There are three main ways to file your taxes:
- Manually, by filling out a form 1040 according to instructions provided by the IRS and then mailing it to the IRS, along with any payments you owe.
- Software programs or the website of a service like TurboTax or H&R Block. The service walks you through a series of questions, fills out your 1040, and (if you choose) files it electronically for you.
- Professional help from an accountant or tax preparer, who will work with you to maximize your refund and fill out your tax return on your behalf.
The Manual option is free. Software programs vary in price, but they’re still less expensive than hiring a professional. Some programs now offer free filing if your return is simple enough. The average cost of hiring a professional to prepare your tax return is about $275 for anything other than the simplest tax situation. Even with help, you could feel like you already did most of the work just by assembling the information an accountant will need. The IRS has a Help Line you can call, but you should be prepared to be on hold and you may not reach the person who can answer your question.
*Contact a tax professional about your specific circumstance to find out more details about the tax benefits of home ownership and other 2018 changes to the tax laws that might affect how you prepare your taxes. The 2018 tax law could mean that itemizing deductions might not be your best tax strategy. To see a list of the tax items for tax year 2018 of greatest interest to most taxpayers, go to https://www.irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged