The Tax Cuts and Jobs Act (TCJA), which took effect in 2018, made broad-scale changes to parts of the tax code, such as deductions, charitable giving, and 529s. These new rules did not, however, change retirement savings incentives such as tax advantages and contribution limits for 401(k)s, 403(b)s, Traditional IRAs, Roth IRAs, and other retirement savings accounts. The TCJA also left rules for health savings accounts (HSAs) unchanged.
Here are some things to keep in mind as you prepare your 2018 tax return. They could help you both lower your tax bill this year and save more on taxes in the future.
1. Save on taxes now using tax-deductible retirement account contributions
By increasing the proportion of contributions you make to certain eligible retirement accounts that are federal income tax-deductible, you could lower your taxable income and thereby potentially reduce your tax burden this year.
Consider contributing the maximum amount allowed by the IRS—up to $19,000, plus another $6,000 catch-up contribution if you're age 50 or older—to your employer's workplace savings plan this coming year.
Also, contributions to a Traditional IRA of up to $5,500—plus another $1,000 if you're at least age 50—may be tax-deductible for 2018, if your income qualifies. You have until April 15, 2019, to make an IRA contribution for the 2018 tax year.1 For 2019, this Traditional IRA contribution limit goes up to $6,000.
2. Save on taxes later using a Roth IRA
Contributions to Traditional IRAs may be federal income tax-deductible or considered pretax, and can help lower your current tax bill. However, contributions to Roth IRAs are considered after-tax, and any investment gains and qualified distributions are tax-free after that.2
The IRS contribution limit for a Traditional IRA in 2019 is $6,000—up from $5,500 in 2018—plus another $1,000 catch-up contribution if you're age 50 or older. The same limit applies to Roth IRAs, as long as your income (as defined by modified adjusted gross income, or MAGI) is not above certain limits: If you are married and file a joint return, you may no longer contribute to a Roth IRA once your income reaches $189,000 in 2018, or $193,000 in 2019. If you are a single filer, the phase-out begins at $120,000 in 2018, and at $122,000 in 2019.
Just as with a Traditional IRA, for the 2018 tax year, you may contribute up to $5,500, plus an additional $1,000 catch-up contribution if you're are 50 or older, to a Roth IRA until April 15, 2019.1
3. Get a handle on the new deductions
The TCJA increased standard deductions for 2018 through 2025 to $12,000 for individuals and $24,000 for married couples filing jointly—nearly double the previous limits. It also slightly increased the higher standard deduction for the elderly, the blind, and people with disabilities. The TCJA eliminated the $4,050 personal exemption, but also created new limits—and updated old ones—for many itemized deductions, such as those for mortgage interest and state and local taxes.
Although these changes could make it more difficult to reach the threshold for itemizing deductions, it will still be possible for many people to exceed the standard deduction by itemizing—especially if they combine a number of larger deductions, such as interest paid on mortgages and student loans, income earned from rental properties, charitable gifts, and business expenses. For those who do still itemize, the TCJA increased the adjusted gross income (AGI) limit for deductions to up to 60% for cash contributions.
4. Use tax-savvy giving strategies
For 2017 and earlier, taxpayers who itemized could deduct the value of charitable gifts from their taxable income, up to certain limits. It therefore made sense to itemize if deductions were worth more than the old standard deduction of $6,350 for individuals, or $12,500 for joint filers.
As the TCJA has nearly doubled the standard deduction amounts for 2018—up to $12,000 per year for individuals and $24,000 per year for joint filers—many people who have grown accustomed to gaining tax advantages from itemizing charitable gifts may no longer meet that threshold for itemizing above the new standard deduction.
But that doesn't mean you can't still get tax advantages from charitable giving! Here're how:
Strategy A: Donating appreciated securities
Rather than selling investments you've held for a year or more that have gone up in value—which would require you to pay capital gains taxes—and then donating the remainder, you can simply donate the appreciated stock or other securities directly to a charitable organization. That can help you reduce the amount of capital gains taxes you pay in addition to qualifying for a charitable gift deduction.
Strategy B: Bunching gifts with a donor-advised fund
The new higher-standard deductions make it more difficult to build up enough deductions to hit the threshold where itemizing makes sense—but it's not impossible. If your deductions total more than the standard deduction, you may still benefit from deductible charitable gifts.
If you usually make charitable gifts annually, it might make sense to bunch several years' worth of gifts into a single tax year. A donor-advised fund (DAF) sponsored by a public charity can help with this. When you contribute cash, securities, or other assets to a DAF, you generally become eligible for an immediate tax deduction—and have a say in how the DAF then invests those contributions for potential tax-free growth. And moving forward, you could at any time recommend the DAF give a grant to one or more IRS-qualified public charities.
Strategy A and B: Donating appreciated securities, with bunching, to a DAF
If you want to donate appreciated securities over the course of several years, you could instead move those securities to a DAF and bunch several years' worth of giving into a single tax year. This can help you build a larger tax deduction while reducing capital gains taxes on those securities.
5. Save on taxes now and in the future with an HSA
Health savings accounts (HSAs) are a great way to save money for health care costs, both in the near term and in the future, through retirement. They also come with triple tax advantages—contributing, spending on qualified medical expenses, and investment growth are all federal income tax-deferred.3
An HSA pairs with an HSA-eligible high-deductible health plan (HDHP), so you generally pay less in insurance premiums in exchange for the higher deductible. By saving money in an HSA, you can pay for medical costs not covered by your health plan with earnings not subject to federal income tax. Plus, all unused money leftover in your HSA automatically gets rolled over each year without penalty, so you can continue using it to pay for qualified medical expenses in the future.
For 2019, an HSA owner with an individual HDHP may contribute up to $3,500 annually to an HSA, while an HSA owner with family coverage may contribute up to $7,000. And if you're over age 55, you may contribute an additional $1,000 in catch-up contributions.
As a secondary benefit, once you reach age 65 or older, you can use your HSA money for non-health-care-related expenses, and you'll only have to pay standard federal income taxes on it. But keep in mind, you'll probably have health care expenses in retirement, so you may want to use that HSA money on those qualified expenses to preserve your tax advantage.
6. 529s can help pay for college and more—in a tax-friendly way
For decades, 529 plans have been a great way to save money, free from federal income taxes, to help loved ones pay for qualified education expenses, such as college tuition. A 529 plan may also offer state income tax deductions. And any growth your 529 money may earn through investing is also tax-free.
Another change coming from the TCJA is it will permit up to $10,000 per year of money from a 529 to be used for K – 12 expenses, in addition to college or postgraduate education expenses. That means 529s will become a tax-smart saving tool for more families than ever.
Although 529s usually have very high contribution limits—as much as $200,000 per beneficiary—your balance cannot grow above your total amount of expected qualified education expenses.
The good news is in 2019, you may give up to $15,000 to to as many people as you'd like, without triggering federal taxes for gifts. What's more, you can combine up to 5 years of gift-tax exemptions. This means you could make a federal income tax-deductible contribution of as much as $75,000 to a 529 plan without paying gift taxes—although you won't be allowed to make any other tax-free gifts to the same recipient during that 5-year period.
Do your homework, and consult a tax professional
A great way to help reduce your tax burden is to consider the 6 options in this article, make smart moves at the right time, and do your own research. No matter who you are or what your current tax situation, consult a seasoned tax advisor to maximize your tax breaks this year and beyond.
Visit the Tax Reform section of the IRS website to learn more about the tax implications of the TCJA and get more details on how this new law might affect your 2018 tax filing.
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