The Christmas tree is down, the decorations are back in the attic, and we’ve rung in the new year. Now that those annual traditions are behind us, it’s time to turn our attention to the next big season: tax season. Did we deduct enough? Is everything accounted for? It’s no secret that tax time can have us all feeling a little unsettled. Here are some tips to help prepare for that looming April 15 deadline.
- Get familiar with the new tax law. While it can be difficult to understand all the detailed ins-and-outs of the Tax Cuts and Jobs Act, passed in December of 2017, it is important to be aware of a few key points. The act significantly altered the tax code by changing deductions, shifting tax brackets and revamping exemptions. While it retains the seven federal income tax brackets defined in the former tax law, it lowers most taxpayer’s rates. The top rate drops from 39.6% to 37%, with the additional new rates following at 35%, 32%, 24%, 22%, 12% and 10%. Income requirement levels also change in the individual tax brackets.
In addition, taxpayers who had previously itemized in order to take advantage of deductions for high mortgage interest, large charitable donations or local taxes may now be unable to reach the standard deduction’s higher limit. Under previous tax law, taxpayers could claim exemptions for themselves, spouses and dependents. The new act eliminates all personal and dependent exemptions. The higher deduction is intended to fill that exemption gap.
While American taxpayers who filed returns in early 2018 followed provisions for the 2017 tax year, filings for this year will fall entirely under the Tax Cuts and Jobs Act. It is viewed as the biggest overhaul of the tax code since the Tax Reform Act of 1986.
- Start organizing. If you haven’t already, now is a good time to start organizing your records and making sure you have everything you need to file properly. As a general rule, you should always have a clearly-marked folder tucked away in a filing cabinet where you can place any applicable donation receipts, canceled checks and other items that you may receive throughout the year. Keeping everything in one spot helps avoid frantic preparations as the filing deadline approaches. Remember, too, that if you don’t receive a hard copy of an annual statement in the mail, you can often log into your online account and print them from there. Below is a list of items to start gathering now.
• Pay stubs
• Mortgage payment records
• Closing paperwork on home purchases
• Receipts for items or services you may want to claim as itemized deductions
• Records on charity giving and donations
• Mileage logs on cars used for business
• Business travel receipts
• Credit card and bank statements to verify deduction
• Medical bills
• 1099-G forms for state and local taxes
• 1099 forms for dividend or other income
- “Bunch” your charitable donations. Under the Tax Cuts and Jobs Act, the new standard deduction of individual taxpayers rose to $12,000 from $6,350 in 2017. For married couples, deductions must exceed $24,000. That’s up from $12,000 in 2017. However, these deduction limits only apply if you itemize your deductions. “Bunching” allows you the ability to boost your deduction allowances by making two or more years’ worth of charity donations in just one year.
- Start thinking about next year. While organizing and preparing your documents for this year, it’s not a bad idea to take a look at how you can start preparing for 2020. Consider contributing more to your retirement plan, which may lower your taxable income. You can also make periodic assessments of your paycheck withholdings to help reduce or even eliminate your tax burden going forward. Keep good records of any job, home, or relationship change in the coming year. And, putting a little money into your savings account every month is always a good plan, especially in the event that you might owe the IRS money.