Your health is important, so you don’t delay that mid-year trip to the doctor for a check-up. Well your financial health is just as important! And June is the perfect time for you and your family to have a mid-year financial check-up.
Not sure how to review your goals and update your financial plan? Here’s how to get started, Part 2.
IMPACTFUL IDEAS FOR INDIVIDUALS:
1. Is Your Budget Busted? Examine your income and expenses over the last 6 Months to see if you are following your budget. Do you have excess cash that could be put to better use with an appropriate investment or used to pay down credit card debt, student loans, or debt with high interest rates? Paying tuition bills NOW means you can take advantage of educational tax breaks, like the American Opportunity Credit (AOC) and Lifetime Learning Credit (LLC). Should your outlays exceed your cash flow, you may have to adjust your spending habits. If you are retired, be mindful of restrictions on withdrawals from investment vehicles and tax implications of distributions.
2. Make the Most of Employee Benefits. Maximize 401(k) contributions, and if you get a bonus or expect extra commissions, consider putting it into your 401(k). 2018 Defined Contribution Plan Limits for 401(k) plans have risen slightly, the 2018 IRA contribution limit is $5,500, the same as last year. Double check to see if your current health insurance plan is the most cost effective plan for you and if not, make a change at open enrollment. Be sure to shore up healthcare accounts like your FSA and HSA. Negotiate expenses. If you’re a dependable employee, chances are that your employer won’t want to lose you over the cost of a cell phone or mileage that’s no longer deductible for 2018. Consider asking your employer to pay lost expenses directly for you or boost your salary to make up the difference.
3. Avoid Nasty Paycheck Surprises and Underpayment Penalties. Take a good look at current withholding – the loss of personal exemptions and the doubling of the standard deduction, plus significant changes to itemized deductions, could affect your tax bill. If things have changed and you are no longer subject to withholding, depending on your finances you may need to make estimated tax payments!
4. Recalculate Retirement. While lounging by the pool, recheck your retirement goals, timeline, and savings so far this year. We mentioned 401(k) contributions above, but also make contributions where appropriate to a traditional IRA which are immediately tax-deductible, or contributions to a Roth IRA that are tax-favored at retirement. If you own a business, inquire about Business Exit Planning to build value today to make your business is attractive to buyers tomorrow, and you get the most $$$$ for your retirement. If you are a partner in a business, be sure there is a buy/sell agreement in place. Estate planning is not always enough to guarantee a secure financial future for your family.
5. Leave a Legacy. Put an estate plan in place or revisit your existing wills, beneficiaries, gifting options, insurance and trust documents in light of tax reform and its “sunset” date of 2025. Transferring assets to a trust or other entity has potential tax consequences to consider, and things have changed dramatically this year. Since the gift tax exemption has been increased to $10 Million ($11.2 inflation adjusted & double that for couples), historically high amount of assets can be transferred without incurring any estate tax. Assets like stocks, real estate and other holdings are passed on at their market value at the time of death, so if they have appreciated they may be sold and no tax ever paid on those gains. Remember states vary widely in whether and how they impose a state estate tax. Reside in a state that imposes a state estate tax? It is crucial that your estate plan addresses state estate tax. For many individuals in the highest income tax bracket, tax reform has essentially made your payment of state income tax more expensive by severely limiting the State and Local Tax Deduction.
6. Monitor Investments and the Markets. Keep in mind that capital losses offset capital gains. Consider selling stocks or securities with losses and offsetting your current year gains. If your losses exceed your gains, you can deduct the difference on your tax return, up to $3,000 per year, and carry over any excess to future years. Long-term capital gains are taxed more favorably than short-term gains, and because the tax brackets have changed for 2018, the long-term capital gains tax structure has changed slightly as well. In 2018 you’ll pay a capital gains tax rate of either 0%, 15% or 20% for assets you held for more than a year. Capital gains tax rates on assets held for less than a year correspond to your income tax bracket. Some investors may owe an additional 3.8% in Net Investment Income Tax – keeping an eye on your portfolio to evaluate the recognition of losses to offset gains may mitigate the NIIT.
7. Establish Your QBI. If you are a sole proprietor or a business owner whose entity is structured as a pass-through, consider the 20% deduction for Qualified Business Income established by tax reform. The good news is the new law brought the tax rate down to keep pace with the significant corporate tax cut, but the bad news is that figuring out the QBI is a bit complex for the non-accountant. You’ll need your CPA here!
8. Examine Medical Expenses. The good news is that medical and dental expenses survived tax reform and for 2018 the magic number is 7.5% of your adjusted gross income (AGI). The doubling of the standard deduction in 2018 means that fewer taxpayers will have an incentive to itemize. But by “bundling” your deductions together – you can take advantage of them in the year that it makes the best tax sense. So if you know that you have a big medical expense coming in 2018, why not get those visits to the dermatologist, dentist, eye doctor and general practitioner in now?
9. Brush up on Changes in Home Related Tax Breaks. For 2018 the rules have changed regarding caps on mortgage interest deduction and eligibility for home equity debt interest deduction. In other words, think twice about the tax consequences of paying down debt with a home equity loan or buying a second home for vacations. The total deduction for all state and local taxes, including both property taxes and either income taxes or sales taxes, is capped at $10,000. As part of tax reform, the deduction for personal casualty losses has been repealed except for those attributable to a federal disaster. Taxpayers who suffer storm or other damage may lose, so your homeowner’s insurance should probably be reviewed.
10. Work from Home. Consider the simplified home office deduction. Taxpayers can elect a simplified deduction for the business use of their home. Tax reform dictates that for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee, but did not change the rules for self-employed persons. If you are self-employed, you can continue to deduct qualifying home office expenses.
11. Turn Your Hobby into a Business. If your hobby makes consistent income, turning it into a business will allow you to deduct losses if you keep good records for the IRS to show you are engaging in the activity to generate a profit.
12. Use the Power of the 529. Whether you are disabled and have an ABLE account to pay for approved expenses, or are saving to pay for college tuition, don’t discount the benefit of saving through a 529 plan. As tuition costs climb they are valuable as savings accounts that grow, but are exempt from federal taxes. Thanks to tax reform, 529 plans can now also be used for private elementary and high school tuition. Plans may vary by state.
13. Get an Insurance Audit Where Appropriate. Life happens, things change. Divorce, marriage, more income, less income, new boat or new baby…….be sure you enough insurance and the right kind of insurance.
14. Got Real Estate? Consider a 1031 Exchange. Tax reform limits this capital gains deferral strategy to real estate assets only. You roll all the capital gains from the property you’re selling into a new property, which takes on the old property’s low basis, keeping money working for you that would have gone to pay taxes.
15. Be Charitable. Give to your family or to a non-profit. Fewer taxpayers will claim charitable deductions over the next few years due to tax reform. But remember your favorite charity when trying to avoid capital gains tax and give them appreciated stock. If you are feeling generous towards family members, you can make annual exclusion gifts of up to $15,000 per individual each year. If you give highly appreciated stock to your child or parent – they take your low basis, and if they are in a lower bracket and sell, the capital gains rate is 0%. That could mean big savings on the family tax bill.
Contact Us: Tax reform has been in effect for over 6 months now – there are 6 months left in the year to make changes that could save you tax dollars on April 15, 2019! Let’s get started and take those first steps to set up a meeting to discuss what type of financial planning is a good idea for your individual situation. Be a part of Fuoco Group’s New Financial Dialogue. Call toll free 855-534-2727, or contact us directly at cpa@fuoco.com. To revisit Part 1 – Best Bets for Business, click here: http://www.fuoco.com/resources/tax-alerts/322-time-is-money-and-its-time-for-a-mid-year-financial-check-up
Article not intended as legal or financial advice – remember when talking about the IRS there can be exceptions to the rules.