Year-end peek ahead at taxes
Joel Dresang: Dave, we’ve had a number of federal tax law changes take effect in 2018. Let’s talk about what investors should be considering so that they’re not surprised when they file their tax returns in April.
Dave Sandstrom: Joel, we’re looking at probably the largest changes to the tax code that we’ve seen in a generation, and it’s likely to affect everybody, and not all people are going to be affected in the same way. So yes, let’s take a look at it. Make sure that you have a good understanding going in how those changes are going to affect you.
Joel: So for instance, the IRS has had a campaign called Paycheck Check-Up where they’ve advised taxpayers to make sure that they’re withholding enough from their earnings to cover their taxes. How does that affect retirees?
Dave: Joel, retirees typically have multiple sources of income. So we might have a pension. You may have Social Security payments coming in, distributions from an IRA, or even a part-time job. So, those multiple sources of income all need to be considered. Withholdings could be different in each case.
What we don’t want to have happen is this tax law affect us to the point where we’re under-withheld and potentially have to face penalties, or we arbitrarily send the government more money and give them an interest-free loan for the year.
Joel: So, it’s a good time to check with a tax professional and maybe look over the forms that you filed last year. The IRS also has a tax withholding calculator online that helps taxpayers figure out how much they’re withholding compared to what they might owe. But is it too late for all of this?
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Dave: No, Joel. We still have time. There’s time left here in the calendar year to take a look at that. And, you know, this is going to affect everybody differently. If you’ve typically used the standard deduction, that calculator can be a really simple quick way to double check. If you’ve itemized in the past and have a more complicated return, it might be a good idea to enlist the help of your tax professional.
Joel: And that’s a good point because the standard deduction is now almost doubled from a year ago. For a married couple filing jointly, the standard deduction is $24,000. So a lot fewer people will be itemizing their tax deductions. What do you advise about that?
Dave: According to the IRS, about 30% of all tax returns itemize the deductions. And that’s where a lot of the changes did occur. We’re looking at things like state and local taxes, property taxes, income taxes, that are now capped. Mortgage interest deduction is now capped.
Significant changes there, so you may fall into that situation where you’ve maybe itemized in the past and you’re not going to in the future. So, whatever that may be, know the answer going in so that you have a real good understanding so you get those taxes right on the money.
Joel: And people who itemized last year and are taking the standard deduction this year might have a different situation for their charitable contributions.
Dave: Joel, I’ve had some investors express that concern, and they’re absolutely right. There could be a limit now to what you can take advantage of on your tax return.
I do point out though, there is something called a qualified charitable distribution available to investors who have reached the age of 70½ and are in that required minimum distribution stage. It allows that investor to shelter that amount that they give to that charity from their taxable income.
Joel: And of course, tax law is complicated and situations vary by individual, so it’s important to check with a tax professional. But remind us why taxes are so important when considering long-term investments.
Dave: Joel, it’s all about cash flow in retirement, and managing your taxes is basically managing your cash. And I think it’s important that we pay our fair share and what we’re legally responsible for paying, but we also want to make sure that we’re taking advantage of the benefits that are available to us. And I think that by doing this little bit ahead of time, we’ll make sure that we’re prepared for tax season next year so that we don’t have that big surprise.
(initially posted Oct. 30, 2018)
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