Last-Minute Tax Tips to Lower Your 2018 Tax Bill
Moves you make between now and the end of the year can have a significant effect on how much tax you have to pay next April, particularly when it comes to investments you might hold outside a retirement account.
But time is running short. Review our list and get cracking.
Employers adjusted workers’ withholding earlier this year to reflect the federal tax overhaul, which reduces tax rates and doubles the standard deduction. But the new law also limits or scraps some popular tax breaks. If you continue to itemize and some of your large deductions have been eliminated, you may not be having enough withheld from your paychecks, which could lead to an unexpected tax bill next April. You are more vulnerable if you live in a high-tax state because the law now caps the deduction for state and local taxes at $10,000.
To find out where you stand, go to the IRS withholding calculator. If you discover you’re not having enough withheld, file a new W-4 with your employer. Because there are only a few pay periods left in the year, reducing the number of allowances you claim may not make a big difference in your withholding, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Instead, go to line 6 on the W-4 and fill in the dollar amount you’d like to have withheld.
In general, you don’t have to worry about a penalty if you owe less than $1,000 after subtracting withholdings and credits, or if you paid at least 90% of the amount of tax due for the current year or 100% of taxes due the previous year, whichever is smaller.
In the past, many taxpayers paid their mortgage and state taxes due in January before December 31 so they didn’t have to wait another year to take the deduction. But prepaying deductible expenses only makes sense if you itemize, and there’s a good chance you won’t have to go through that rigmarole when you file your 2018 tax return.
The new tax law nearly doubles the standard deduction to $12,000 for single taxpayers and $24,000 for married couples who file jointly. As a result, only about 13% of taxpayers are expected to itemize on their 2018 return, down from nearly one-third in 2017, according to the Joint Committee on Taxation.
Still, if you itemized in the past, it’s worth sitting down with a tax professional or firing up a tax software program. If you’re close to the threshold for itemizing deductions, prepaying your mortgage and increasing your charitable contributions could provide you with enough deductions to itemize and lower your tax bill, says Gil Charney, a director at H&R Block’s Tax Institute.
This is also a good time to review your medical bills for the year. For 2018, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. If you’re close to the limit, consider scheduling a visit to the dentist or eye doctor before year-end. In 2019, your medical expenses will have to exceed 10% of your AGI before you can deduct them.