If you didn’t adjust your tax withholding in early 2018, you might be in for a surprise when completing your tax return this year. A lot of people opted for the “wait-and-see” approach to determine if the Tax Cuts and Jobs Act would impact their return. Initially, the Tax Policy Center projected the new legislation would reduce individual income taxes by an average of $1,260, and more for higher income earners.1
An IRS report on early 2018 returns revealed that the average tax refund had dropped 17 percent from last year.2 That largely may be due to taxpayers not adjusting their withholding form to have more money taken out in payroll taxes, resulting in small increases in each paycheck last year. Getting a small increase in pay twice a month is not nearly as dramatic as receiving a large lump sum once a year – but many taxpayers did receive a tax break nonetheless.
Those that likely could be paying more in taxes under the new legislation are upper-bracket income earners living in states with high taxes, such as New York, New Jersey, Connecticut, Pennsylvania and California. That’s because the law imposed new caps on the amount of state, local and real estate taxes they can deduct.3
We’re happy to sit down with you and your CPA to review your return to see if there are tax-efficient strategies we can implement to help benefit your savings and investment plans.
If your income is too high to contribute to a regular Roth IRA (if modified adjusted gross income exceeds $137,000 for single or $203,000 if married), be aware that this income cap does not apply to Roth 401(k) accounts, which allow you to save substantially more each year than a regular Roth. More employers are starting to offer Roth 401(k) plans in addition to traditional 401(k) plans. If you hold both types of plans, you can save a combined total of $19,000 in 2019 contributions as well as an additional $6,000 in catch-up contributions for those age 50 or older.4
You may be able to deduct medical expenses on your tax return – one of the few deductions still available for those who itemize. For 2018 returns, taxpayers may deduct the amount of qualified medical expenses that exceed 7.5 percent of their adjusted gross income; in 2019, that number increases to 10 percent. Qualified expenses include preventive care, treatment, surgeries, vision and dental care, psychologist and psychiatrist visits, prescription medications, and prescribed aids such as glasses, contacts, dentures and hearing aids.5
Also, don’t forget to track your mileage to and from medical visits, which is deductible at a rate of 18 cents per mile for 2018 returns. That rate increases to 20 cents in 2019.6
Another tax savings option is the use of an HSA, or health savings account. If you are covered by a qualifying high deductible health care plan, you can use money in an HSA to pay for qualified medical expenses. You may deduct contributions on your tax return without having to itemize, and your savings in the HSA can even be invested. Savings grow tax-deferred, and distributions are income-tax-free if used for qualified medical expenses. Be aware, however, that the return and principal value of invested HSA assets will fluctuate and, when accessed, may be worth more or less than their original value. Assets placed in investment options are not FDIC-insured, nor are they guaranteed by the bank that administers the health savings account.
One way to help maximize the opportunity for health savings account investment gains? Pay for qualified medical expenses out-of-pocket (be sure to keep your receipts). This enables invested HSA assets the opportunity to continue growing tax-deferred. You are not required to pay for your out-of-pocket medical expenses with your HSA funds and can claim any amounts over the adjusted gross income threshold as a medical expense. Note that in years you claim out-of-pocket medical expenses as a tax deduction, you cannot later reimburse them from your HSA.7
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 CBS News. Feb. 19, 2019. “Americans shocked by impact of new tax law: ‘My jaw hit the floor.’” https://www.cbsnews.com/news/federal-tax-refund-2019-americans-shocked-by-impact-of-new-tax-law/.
Accessed Feb. 19, 2019.
2 Brian Faler and Aaron Lorenzo. Politico. Feb. 22, 2019. “Average tax refund down 17 percent, IRS reports.” https://www.politico.com/story/2019/02/22/irs-tax-refunds-2019-1207283. Accessed Feb. 19, 2019.
3 Megan Leonhardt. CNBC. Feb. 12, 2019. “Here’s who is more likely to get a lower refund this tax season, according to experts.” https://www.cnbc.com/2019/02/12/who-is-more-likely-to-get-a-lower-refund-this-tax-season.html. Accessed Feb. 19, 2019.
4 Darla Mercado. CNBC. Feb. 10, 2019. “3 tips to help you boost your tax-free income in retirement.” https://www.cnbc.com/2019/02/08/three-tips-to-help-you-boost-your-tax-free-income-in-retirement.html.
Accessed Feb. 19, 2019.
5 Intuit Turbo Tax. “Can I Claim Medical Expenses on My Taxes?” https://turbotax.intuit.com/tax-tips/health-care/can-i-claim-medical-expenses-on-my-taxes/L1htkVqq9. Accessed Feb. 19, 2019.
6 Kelly Phillips Erb. Forbes. Dec. 14, 2019. “IRS Announces 2019 Mileage Rates.” https://www.forbes.com/sites/kellyphillipserb/2018/12/14/irs-announces-2019-mileage-rates/. Accessed Feb. 19, 2019.
7 Amy Fontinelle. Investopedia. Feb. 27, 2019. “How to Use Your Health Savings Account (HSA) for Retirement.” https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp. Accessed Feb. 27, 2019.