Not Sure If You Will Owe Taxes? What to Do Now

SMART INSIGHTS FROM PROFESSIONAL ADVISERS

Not Sure If You Will Owe on Taxes in April? Here's What to Do Now

Before you even begin preparing your tax return, there is still time left to take some steps to minimize the potential damage.

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While a lot of people may be smiling when they file their federal income tax returns this year, there will be some frowns, too.

Beginning in 2018 tax rates have been lowered for many people thanks to the Tax Cuts and Jobs Act of 2017. A person or couple earning roughly the same amount in 2018 as in 2017 could very well owe less money or receive a larger refund check this spring. However, since a number of exemptions and deductions were limited or eliminated beginning 2018, not everyone will be better off.

SEE ALSO: Claim These Tax Deductions Even If You Don't Itemize

Here’s one comparison for high-income taxpayers. A married couple earning $500,000 in 2017 was in the 39.6% marginal federal tax bracket; that same couple earning the same income in 2018 paid an average federal tax rate of 35%. Plus, this couple could have earned about $100,000 more in 2018 before falling into the top federal tax bracket of 37%.

However, one of this couple’s largest tax deductions used to be their state income taxes — easily $30,000 or more in my example. But that deduction, coupled with their property taxes, is now limited to $10,000. So, the tax savings from lower tax brackets in 2018 may not be as beneficial as one had hoped.

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There are many reasons people could have earned more money last year than in 2017, such as a new job, promotion and healthy bonuses or profits from their business. With the roaring stock market in 2017, stocks sold in early 2018 may have incurred higher capital gains, or executives with stock bonus plans may have cashed in stock early 2018 at a higher price than in years past, leading to more W-2 income.

Steps to Minimize Your 2018 Tax Bill

Whether you think you will owe less or owe more — what can you do between now and April 15 to minimize your tax bill? Here are a few steps to take:

People who haven’t fully funded their Health Savings Account for 2018 can still make deposits into this account until April 15, 2019, and receive a deduction on their 2018 tax return. Individuals who were enrolled in a qualifying high-deductible medical plan can contribute up to $3,450 to their account, while those with family coverage can put in up to $6,900 for 2018.

Entrepreneurs Should Contribute to a Retirement Account.

Business owners and others who are self-employed can still contribute to specific retirement accounts and reduce their 2018 tax bills. Some of these include Simplified Employee Pension (SEP) IRAs, existing Solo 401(k)s or existing defined benefit pension plans.

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Contributions to these plans can significantly cut your tax bill while also funding your retirement. For example, a person can save about 20% of their net self-employment earnings, not to exceed $55,000, into a SEP IRA for 2018. Your tax preparer can calculate this precise figure when they complete your tax return. These tax-deductible contributions to the SEP IRA can be made until a person files their 2018 taxes, which can be in mid-October 2019 if you file for an extension.

Fund Your Traditional or Roth IRAs.

While this move may not save money for most people, you have until April 15 to contribute to a traditional Individual Retirement Account or a Roth IRA for 2018 as long as you have earned income. At the very least, it’s a good habit to fund IRAs each year to build your retirement nest egg.

See Also: 5 Often Overlooked Tax Strategies as You Approach Retirement

Steps to Get Your Tax Preparation in Gear

For those who haven’t kept good records this year or met with their tax adviser and don’t know how much they may owe for 2018, there is time to get organized. To make certain you have enough cash available to pay the IRS when April 15 rolls around, I recommend taking these steps now:

Collect all W-2 and 1099 Tax Forms, Determine 2018 Business Income and Expenses as Well as Capital Gains.

Provide this information, as well as a copy of your 2017 tax returns, to your accountant and ask them to compile a quick estimate of how much you may owe.

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Beef up your Savings Account.

To relieve any anxiety over having enough money to pay your taxes, plan to have more money than you may need. That means depositing any extra cash into a savings account for a few weeks.

For example, if you expect a bonus from your employer soon, deposit those funds into an interest-bearing savings account so it’s there if needed to pay taxes. Once you have a hold on what your tax bill will be, any extra cash can then be invested for future goals, like retirement or college education, or paying down debt. If you’re expecting a refund, start putting that cash to good use rather than letting it sit idle in the bank.

Consider Selling Stock Now to Pay Capital Gains Taxes.

If you don’t have extra cash coming your way in the next several weeks, and your savings account balance is low, consider selling additional stock now to cover 2018 capital gains tax. Given the stock market’s gains in January of 2019 — the Standard & Poor’s 500 index increased nearly 8% that month — it may be a good time to sell some stock and use those profits for tax payments. Typically, I don’t like dipping into investments to pay taxes, but it’s better than missing the tax deadline and incurring penalties, or taking out a loan.

See Also: 6 Things Your Tax Preparer May Not Want You to Know

Lisa Brown is a partner and wealth adviser at Brightworth, an Atlanta-based wealth management firm serving high net worth families across the country. "The most rewarding part of my job is helping my clients retire well, with confidence and security about their future." Working with busy corporate executives for nearly 20 years has been her passion inside the office. Outside the office she's an avid runner and supporter of charitable causes focused on homeless children and their families.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.