We made it through an exciting year of tax reform, and hopefully you did too! The changes to the tax code created many challenges – and opportunities.

This article aims to summarize what we saw after preparing several thousand tax returns, as well as offer opportunities that you may be able to utilize next year.

If Tax Rates Decreased, Why Did I Owe More Money Than In Previous Years?

The Tax Cuts and Jobs Act lowered tax rates for all individuals, so many of our clients were surprised to learn they owed more in tax for 2018 than in 2017. Why did clients owe more tax than they did in the past? Most W-2 workers rely on employer withholding to cover their annual tax bill, and because of the changes to the tax law, some employers neglected to tell employees to update their W-4, and employees may have neglected to update their W-4 despite recommendations from their employer to do so. Although many taxpayers paid less total tax, it probably didn’t feel that way when they saw a large tax bill at year-end. To avoid tax surprises in the future, we recommend taxpayers review their W-4, and increase their withholding if needed.

Are Charitable Contributions Still A Good Idea?

Some clients made charitable contributions but received no tax benefit. What a bummer! Taxpayers only receive a charitable contribution tax benefit if they itemize. Since fewer clients itemized this year (due to the increased standard deduction), they were unable to take advantage of potential tax savings. There are many tax strategies taxpayers can use to take advantage of their charitable contributions. For example, taxpayers can bunch their contributions, donate to a donor-advised fund, or utilize qualified charitable distributions.

I’m Not Itemizing…So I Don’t Have To Keep Track Of My Expenses, Right?

Wrong! Some clients assumed if they weren’t itemizing, they could forgo sending certain tax-related documents to their accountants. It’s important to remember that although some deductions are not available on the federal level, they still may be available on the state side. For instance, if a client is not itemizing, then real estate taxes paid provide no tax benefit on the federal level. However, Illinois still allows a tax credit based on total real estate taxes paid. Likewise, Missouri allows a tax deduction for insurance premiums paid, and some states still allow a deduction for investment expenses. We recommend you check with your financial advisor to determine which expenses to keep track of. Don’t assume that federal and state tax deductions mirror each other.

The Rules For Tax-Advantaged Accounts Don’t Change Much, Do They?

Actually, they do. It’s important to stay up to date on the rules for tax-deferred accounts because there have been many exciting changes. For example, the IRS no longer applies a penalty when 529 funds are used toward K-12 tuition payments (just be careful about the state tax treatment). This provides additional flexibility for taxpayers with children who are not yet in college. For retirement accounts, tax-deferred account contribution limits increased in 2018 and increased again for 2019! If you are 50 years or older, you can still take advantage of catch-up contributions. If you forget to make your tax-deferred contributions, or your income situation changes after year-end, remember you still have until April 15th of the following year to put money into your tax-deferred accounts (and until October 15th for those who are self-employed and utilize a Solo 401(k) or SEP IRA). It’s important to stay up to date on changing limits and changing rules for tax-deferred accounts because they can provide a fantastic way to shield your income.

What Did We Learn?

Ultimately, taxpayers who could no longer itemize and had not been subject to the alternative minimum tax in the past were most negatively affected by the tax changes. We recommend taxpayers review their W-4 and implement tax planning strategies to take advantage of the many attractive tax deductions that are available. It’s important for taxpayers to stay up to date on tax changes so they can run accurate tax projections and avoid surprises at the end of the year. Every taxpayer’s situation is different, so consult with your financial advisor to determine the best way to handle your tax situation going forward.

About Savant Wealth Management

Savant Wealth Management is a leading independent, nationally recognized, fee-only firm serving clients for over 30 years. As a trusted advisor, Savant Wealth Management offers investment management, financial planning, retirement plan and family office services to financially established individuals and institutions. Savant also offers corporate accounting, tax preparation, payroll and consulting through its affiliate, Savant Tax & Consulting.

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