Your Financial Future: Be Proactive To Pay Less Taxes For 2018

If you want to pay less income tax this year, you need to be proactive now before the end of the year.

If you want to pay less income tax this year, you need to be proactive now before the end of the year. The new tax law passed last December governs tax returns for 2018. Here are some of the basic changes.

There will still be seven tax brackets. The top bracket was lowered from 39.6 percent to 37 percent. Some of the income limits in the middle brackets were expanded to cover a higher income before moving to the next higher bracket. Remember, our tax system is progressive. That means that if you end up in the 24 percent bracket, your marginal rate will be lower. Part of your income will be taxed at 10 percent, 12 percent and 22 percent. If you are married and filing jointly with an adjusted gross income of $165,010, only $10 will be taxed at 24 percent.

Because of the wider spread in brackets, there will be more room to bump the bracket with your qualified money. This is when you are retired and over at least age 59½: you could pull more money out of a qualified account without moving into a higher tax bracket. You might do this if you wanted to “detaxify” money you need to spend in retirement. It may also make sense to consider a Roth conversion.

The standard deduction was increased to $24,000 for a couple filing jointly. This is almost double the old amount. Personal exemptions were eliminated. There will still be extra credit for people over 65 or blind. Long-term capital gains rates are still available. These are to encourage investments. A couple filing a joint return will not have to pay long-term capital gain tax if their combined income is under $77,200. To qualify as long term, you must have owned the investment for at least one year and one day. If you owned it for a shorter time, it will be taxed as ordinary income which is a higher rate.

Owning non-qualified mutual funds can be very tax inefficient. They tend to generate a lot of ordinary dividends instead of the more tax friendly qualified dividends. Qualified dividends are taxed at the lower capital gain rate which can be as low as zero depending on your total income. These mutual funds also generate unrealized capital gains. This is when you pay tax on money you did not receive nor did you sell anything. They are generated by the mutual fund manager buying and selling within the fund. Owning a variable annuity (VA) using non-qualified funds also increases your taxes on market holding. All earnings coming out of the VA are taxed as ordinary income. You may be able to reduce your tax bill with better asset allocation.

Many people do not know you can reduce your taxes when buying long-term care insurance. For a couple age 60-70, it is $4,160. The amount saved is less at younger ages. Many younger people do not take advantage of a great tax saving for younger people. This is by using a Health Savings Account. It is bought in conjunction with a high deductible health insurance plan. A family may contribute up to $6,900 per year. This decreases current income taxes, grows tax free, can be used tax free for qualified medical expenses. You can carry the balance forward each year. You can no longer contribute once you are on Medicare, but you can still use your account balance for medical or insurance expenses.

Be proactive with your tax planning. This means having a plan to pay the lowest amount of taxes that you legally are required. The strategy will be different depending if you will need to spend your money during retirement or if you will be leaving it as a legacy upon your death. Work with an advisor who understands how to help you accomplish this task.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to [email protected].