This year is particularly important to do a mid-year tax review, because the new tax law may have changed your tax picture. If you’re not looking ahead, according to Kiplinger’s article “Midyear Moves for Retirees to Rein In Their Tax Tabs,” you may miss some critical opportunities.
Some taxpayers will find that they owe less taxes this year, while some will owe more. You might decide to switch from itemizing to taking the increased standard deduction. It’s also possible that you’re not going to pay the AMT (alternative minimum tax) this year.
Ramp Up Your Nest Egg. Are you still working? Then max out contributions to your retirement funds to help lower your taxable income. If you are 50 and older this year, you can put away as much as $24,500 in a 401(k) and $6,500 in an IRA.
Build Health Savings Accounts. If you have an HSA, be smart and put away as much as you can. Workers with HSA-qualified health coverage can contribute $6,900 in 2018 and those with self-only coverage can squirrel away as much as $3,450. If you’re 55+, you can put in an extra $1,000. HSAs are a great tax saving tool: the money goes in pre-tax, grows tax-free and when used to pay qualified medical expenses, is withdrawn tax-free.
Consider Your Deduction Strategy. The standard deduction in 2018 is rising to $12,000 for singles and $24,000 for marrieds filing jointly, so this is the year to figure out whether to itemize. Tax reform has also limited itemized deductions. The write off for state and local income, sales and property taxes is now capped at $10,000. Seniors (65 and up) can still take an extra standard deduction of $1,300 per person for joint filers and $1,600 for singles. For a married senior couple, itemized deductions would have to be more than $26,600. If the couple uses the full $10,000 write off for state and local income, sales and property taxes, they have to come up with more than $16,600 in deductions to save by itemizing.
Medical Expenses. The medical expense deduction is still in place. It is better in 2018, since the threshold dropped to 7.5% of adjusted gross income. Next year, that threshold rises to 10%. If possible, you should consider bunching medical costs into 2018, so that you can take advantage of that lower threshold.
Roth IRAs. Putting money in a Roth this year won’t cut your 2018 taxes. However, if you expect tax rates to climb, now is the time to put money in a Roth and pay taxes now, rather than later. Tax reform took away the ability to reverse a Roth conversion starting in 2018, so wait until the end of the tax year when you have a clearer vision of your numbers to do any conversions.
Reference: Kiplinger (June 29, 2018) “Midyear Moves for Retirees to Rein In Their Tax Tabs”