Tax Refunds Down 17%

Weekly Update – Tax Refunds Decrease

The IRS is reporting that the average 2018 tax refund is down 17% from last year in wake of the new tax law.  Why are refunds lower, and what can we do to better prepare in 2019?

The Why: The new tax law changed the withholding tables that employers use, meaning many employees saw a small increase in their paychecks during 2018.  Small enough that many of us didn’t even notice.

Additionally, the State and Local Income Tax (SALT) that can be written off was capped at $10,000.  This proved to be especially painful for residents of high tax states such as New York.

Going Forward: If you are still working and saw a significantly smaller return, or even had to pay, there are several steps that you can take to help reduce the chances of any tax surprises next year.  These include:

• Tax Withholding – Visit your business manager or HR department and find out what you are withholding for taxes.  Indicate a “0” to have the most withheld from your pay towards taxes.  If you are already at “0” you can ask your employer to withhold a dollar amount over and above for taxes.

 

• Retirement Contributions – Increase your contribution to a company sponsored retirement plan such as a 401(k) or 403(b).  If you are not covered by a retirement plan, consider opening a pre-tax IRA and starting monthly contributions.

 

• College Savings – New Yorkers can receive a state tax deduction on contributions to a child’s 529 college savings plan.

 

• Start a Roth Savings Account – While this will not help your tax situation during your working years, it can be invaluable during retirement, see below.

 

If you are in retirement, consider these steps:

• College Savings – If you have grandchildren, consider contributing to their 529 college savings plan.  For New Yorkers, a single person can receive a state income tax deduction for up to $5,000 in contributions, $10,000 for a married couple. 
• Social Security & IRA Distribution Withholding– Review the amount you are having withheld from your social security payments and retirement plan distributions and consider increasing by 5%.

 

• Income Planning – Do you have a Roth account and/or should you?  Since Roth accounts offer tax free withdrawals they can provide an additional retirement income bucket, allowing flexibility and tax planning advantages.  If you are in retirement and do not have any Roth accounts, ask your tax professional if it makes sense to do an annual Roth Conversion.

 

• Portfolio Turnover – Mutual funds and some individual stock strategies outside of a retirement account can produce ongoing capital gains that are taxable to investors.  Consider Exchange Traded Funds or ETFs as a way to gain access to diversified markets in a cost effective, tax efficient manner.

A couple of hours per year spent on tax planning can prove extremely valuable.  I hope you find this information helpful.  If you would like to review ways to help your tax situation for 2019, please contact the office to schedule a meeting and I’ll be glad to help in anyway that I can.

Have a great weekend!

Clint