If you’re hoping to save on your taxes in 2018, you have about two months to act.
This has been a busy year for accountants, as the 2018 tax year will mark the first time that taxpayers will file under the Tax Cuts and Jobs Act.
The new legislation put through sweeping changes, including roughly doubling the standard deduction to $12,000 for singles ($24,000 for married joint filers), eliminating personal exemptions and trimming individual income tax rates.
Filers who have previously itemized their deductions will also notice that a slate of miscellaneous tax breaks are gone, including unreimbursed employee expenses and tax preparation and investment management fees.
Previously, you were allowed to deduct these expenses to the extent they exceeded 2 percent of your adjusted gross income.
“For the majority of people, the changes are around standard and itemized deductions — not very many will itemize anymore,” said Dave Stolz, a CPA and member of the American Institute of CPAs personal financial specialist credential committee.
Here are a few steps you can take now to manage your tax load for 2018.
As part of the new tax law, the IRS and Treasury updated its withholding tables.
These tables, along with Form W-4, serve as guidelines for your employer to ensure that you’re having the right amount of income tax withheld from your pay.
If you withhold too much, then you’ve made an interest-free loan to the government and you’ll get a refund. If you fail to withhold sufficiently, you’ll be getting a bill from Uncle Sam for taxes owed.
In July, the Government Accountability Office said that 21 percent of taxpayers — or roughly 30 million people — aren’t withholding enough taxes from their compensation.
Previously, it may have made sense for workers to withhold less tax from their paychecks if they itemized deductions or if they claimed multiple personal exemptions for dependents in their home.
Those filers might be in for a nasty surprise when they file their 2018 taxes next spring: a bill from the IRS.
Head that off by taking a closer look at your paystub and comparing taxes paid last year to the amount you’re withholding now.
You can also ask your accountant to give you a projection based on the amount you’ve already paid to determine whether you’ll owe or receive a refund next spring.
“If the income is the same, but your withholding is considerably less this year, then you have reason to be concerned,” said Cari Weston, CPA and director of tax practice and ethics at the AICPA.
Workers aren’t the only ones who need to be vigilant. Retirees should also make sure that they’re withholding sufficient taxes from their income.
Filers collecting Social Security can use Form W-4V to withhold a flat rate from each payment: 7 percent, 10 percent, 12 percent or 22 percent.
If you’re collecting a pension or annuity, you can use Form W-4P to ensure you’re withholding enough in taxes.
If you’re just short of the newly doubled standard deduction, consider being a little more generous this year.
That is, think about cramming in two years’ worth of charitable gifts in 2018 to help you get over the hurdle so that you can itemize deductions on your tax return.
“Look at your itemized deductions and see how close you are to the new threshold,” said Stolz. “Does it make sense to double up? You can make your 2018 and 2019 contributions to charity and get a benefit for some of that.”
This strategy is known as “bunching” your charitable gifts.
Whether you’re selling your art on Etsy or you’re driving for Uber or Lyft, if you want to claim losses and expenses for your business, make sure your venture is a business and not a hobby.
The IRS draws a distinction between hobbies and businesses, based on the amount of time you put into your pursuit and your attempts to make it profitable.
You must report income from hobbies and businesses, but there are stark differences between the two when it comes to deductions and expenses.
For hobbies, under the old law, you were allowed to deduct hobby-related costs up to the amount of income you generate from your pastime. These costs, plus other miscellaneous itemized deductions, were deductible to the extent they exceed 2 percent of your adjusted gross income.
Now, under the new tax law, this itemized deduction for hobby costs is eliminated.
Meanwhile, a slate of tax breaks are in effect for small businesses, including a new 20 percent deduction on qualified business income for certain entrepreneurs with pass-through entities.
To claim the 2018 appropriate business tax breaks for your side hustle, take the remaining time in the year to make it official, said Weston.
That means, you should separate your business’s finances from your own by both opening a bank account and using a separate credit card for your side hustle, she said.
“If the IRS sees commingling of funds, the assumption is that anything deposited into the account is revenue,” Weston said.
You can also set up an entity — say a limited liability company — for your side business, which has the added benefit of offering you legal protection from creditors. Be sure to advertise and market your business, too.
“You’ll want to make sure that you’ve documented that you’re in it for a profit, or you risk losing the deduction,” said Weston.