The new federal Tax Cuts and Jobs Act contains sweeping changes that will affect Americans in all tax brackets in 2018. While most people will likely pay less federal tax, changes ranging from charitable donations to paying for private school tuition will have an impact on nearly everyone. Those who begin planning now may be able to save thousands of dollars when filing their 2018 taxes next spring.
To make the most of the tax law changes, here are six steps just about everyone can take now:
Stick to Tried and True Retirement Strategies. 401(k) retirement savings plans and Individual Retirement Accounts (IRAs) continue to be the foundation of any retirement savings plan. Take advantage of the new 401(k) plan contribution limits, which increase by $500 this year. People under age 50 can contribute up to $18,500, while those 50 and over can contribute $24,500. IRA contribution limits remain unchanged; $5,500 for those under age 50 and $6,500 for age 50 or over.
In addition, people who don’t qualify to contribute directly to a Roth IRA can still contribute to an after-tax traditional IRA and convert that money into a Roth IRA. However, this strategy is most effective for people that don’t have funds in other traditional IRAs due to the IRA Aggregation Rule when converting from a traditional IRA to Roth IRA.
Contribute to a Health Savings Account. People with high deductible health insurance plans can use a health savings account to save for retirement while reducing their taxes now. Contribution limits to these plans increase this year, rising to $3,450 for singles and $6,900 for family plans, plus an extra $1,000 for people 55 or older. By treating this account like an investment account instead of a short-term expense account, the funds can be invested and grow into another source of retirement funds. That is why you should try not to spend these funds now unless, of course, you have an emergency or other very large medical expense.
Use a Donor Advised Fund for Charitable Donations. Individuals and families who donate to charitable organizations should re-examine their charitable giving strategy. Because married couples will receive a $24,000 standard deduction, they will not be able to deduct their charitable contributions if their total itemized deductions are less than $24,000.
But people can still make donations and qualify for a tax deduction by establishing a charitable giving plan using a donor advised fund. For example, by setting aside $30,000 this year in this fund instead of giving $10,000 annually over three years, the couple will be able to itemize their deductions in 2018 since they are higher than the standard deduction, and receive an incremental tax benefit from their charitable gift.
Child Tax Credits. For parents with children 17 or younger, the child tax credit has doubled to $2,000, and it isn’t phased out until adjusted gross income exceeds $200,000 for individuals or $400,000 for married couples. The new income limits should enable many parents to take advantage of the increased credit and provide significant savings. For example, a couple with four children will be able to subtract $8,000 from their tax bill annually.
Using 529 Plans for K-12 Private Tuition. The new tax law enables parents and grandparents to withdraw up to $10,000 annually from 529 college savings plans to pay for private school tuition for children from kindergarten through high school.
For example, couples in New York can deduct up to $10,000 annually on these contributions from their state tax return ($5,000 for single filers). It’s possible for a couple to deposit $10,000 in 2018, receive a $10,000 tax deduction on their 2018 state tax filings, and also withdraw the money in 2018 for private school tuition. Each state has different limits to get the state tax deduction so make sure to check your state’s rules and consult a tax professional with questions about your specific situation.