According to IRS estimates, taxpayers collectively pay about 82 percent of taxes they legitimately owe. This amounts to about $458 billion annually in lost taxes, based on data from 2008 to 2010.1
Of course, we do not recommend strategies to avoid legitimate tax liabilities. However, it is important to stay current with the constantly evolving tax code or work with an experienced tax advisor who does. For example, many people were caught off guard this past year largely due to incorrect withholding amounts after the new tax reform law went into effect.
If you’d like to review your current financial strategy, we can provide recommendations for tax-efficient tools and financial vehicles available to help you reach your goals. We can also work with other qualified professionals — such as a tax accountant or estate planning attorney — to implement the tools to make your strategy work efficiently and effectively.
As we move into the second half of the year, let’s review a few key tax considerations for your 2019 return.
The U.S. tax system is basically pay-as-you-go; if you wait until you file your return to pay any of your tax bill, you’ll be assessed a penalty. Because there were significant changes to the tax code in 2018, many filers came up short on their withholdings and owed higher taxes. In response to this common occurrence, the IRS dropped the threshold under which the 2018 under-payment penalty was assessed. Normally a penalty is imposed if you pay less than 90 percent of your tax liability for the year, but the IRS reduced it to 80 percent for 2018. Be aware that this was a one-time adjustment, so next year that threshold will go back to 90 percent unless the IRS adjusts it again.2
If you are employed by a company, you many need to submit a new W-4 form to your employer with an updated withholding rate. For help figuring out how much of your income should be withheld in anticipation of your 2019 return, check out this withholding calculator at IRS.gov.3
Also note that the IRS may waive an underpayment penalty under the following exceptions:4
- You fell short due to a casualty event, disaster or other unusual circumstance.
- You retired (must be age 62 or older) or became disabled during the tax year and the underpayment was due to reasonable cause and not willful neglect.
- You were unable to accurately determine your estimated tax payment because so many changes enacted by the tax reform applied to your situation.
One way to potentially claim a larger deduction on a future return is to bundle deductible expenses. For example, instead of spreading out payments for your child’s braces over two years, pay the tab all at once. This may help you surpass the threshold to deduct medical expenses, which in 2019 will be 10 percent of your adjusted gross income.5
If you were affected by the $10,000 state and local tax (SALT) deduction cap, you might want to consider other ways to help offset state taxes. For example, repositioning some of your portfolio assets to Treasuries and municipal bonds issued in your state would exempt the income they provide from state taxes.6
Our firm assists retirees and pre-retirees in the creation of retirement strategies utilizing investment and insurance products. Advisory services offered through B.O.S.S. Retirement Advisors, a Registered Investment Advisory firm.. Insurance products and services offered through B.O.S.S. Retirement Solutions. Marketing materials provided by Infinity Marketing Services.
1 US Government Accountability Office. May 9, 2019. “Tax Gap: Multiple Strategies Are Needed to Reduce Noncompliance.” https://www.gao.gov/products/GAO-19-558T. Accessed May 13, 2019.
2 IRS. March 22, 2019. “IRS expands penalty waiver for those whose tax withholding and estimated tax payments fell short in 2018; key threshold lowered to 80 percent.” https://www.irs.gov/newsroom/irs-expands-penalty-waiver-for-those-whose-tax-withholding-and-estimated-tax-payments-fell-short-in-2018-key-threshold-lowered-to-80-percent. Accessed May 13, 2019.
3 IRS. May 1, 2019. “IRS Withholding Calculator.” https://www.irs.gov/individuals/irs-withholding-calculator. Accessed May 13, 2019.
4 IRS. “Topic Number 306 – Penalty for Underpayment of Estimated Tax.” https://www.irs.gov/taxtopics/tc306. Accessed May 13, 2019.
5 Sally Herigstad. TaxAct. “6 Tips for Planning Next Year’s Taxes Now.” https://blog.taxact.com/planning-next-years-taxes/. Accessed May 13, 2019.
6 Erik Sherman. Fortune. April 19, 2019. “Investment Strategies That Will Pay Off Next Tax Season.” http://fortune.com/2019/04/19/investments-taxes-2019/. Accessed May 13, 2019.