With the dust settling around 2017’s Tax Cuts and Jobs Act, you’ll know, after completing your 2018 tax return, just how it affects you. Your refund may be a little bigger, somewhat smaller, or completely unrecognizable compared with past years. Now that most of the provisions of the legislation have taken effect, you can move forward and adjust your personal tax situation. To help you out, here are some of the best moves you can make to bring your tax performance in line with your expectations. Keep in mind that these are general suggestions that may or may not apply to your case, so whenever possible, make what-if comparisons before deciding to change a strategy.
The Internal Revenue Service has been sounding the withholding tax alarm for a year now so that taxpayers weren’t caught unaware by changes resulting from the TCJA. Whether you heeded the IRS warnings or not, your 2018 refund (or amount owing) reflect the changes you’ll likely see going forward. If you’re happy with the 2018 tax year results, then you don’t need to take action. However, if you’re not pleased with the outcome and you’re working as an employee, you don’t have to simply accept the new status quo. You can change your tax withholding by your employer by filing a new Form W-4 with your company’s payroll department.
If you’re after a bigger refund, one point to remember is that your refund is simply a return of your own money, loaned interest-free, to the government. For taxpayers with poor money-saving discipline, a tax refund is perhaps a good way to ensure an annual cash accumulation, but even sitting in a low-interest savings account, you’d have more at the end of the year than you’d get in a refund. The caveat is, of course, that you need to keep those savings untouched when they’re under your control. A strategy to consider: File a new W-4 and determine how much extra you’ll see in your regular pay packet. Then set up automatic transfers between checking and savings to capture these extra dollars. Any money earned in interest is yours, not the government’s.
Increase Your 401(k) Contribution
You’ve got an extra $500 of maximum contribution room on your 401(k) starting in 2019. That’s only about $10 per week, so if you’re someone who usually maxes out, the additional amount shouldn’t be a problem. Since it’s already March, be sure to prorate any changes you make to automatic deductions, or direct an extra $500 to your 401(k) when your refund arrives to lock in your deferred tax savings. The same $500 increase applies to IRA account as well, so make the same changes here if you’re able.
Set Up an HSA
If you don’t already have a health savings account set up, there’s a good reason to do it now. The higher standard deduction that’s now in place means that it’s harder to write off medical expenses to your advantage using the itemized deductions method. HSA contributions are tax deductible, essentially putting eligible medical expenses outside of standard or itemized deductions when you pay these through your HSA.
A Smart Move
If you’re planning to move in 2019, and you have control over where you’re heading, targeting tax-friendly states may be advantageous because of the TCJA provision that limits state and local tax deductions to $10,000. Moving to one of the nine states without income tax may work in your favor. These states are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If these aren’t options for you, compare state tax rates between your potential destinations.