Tax reform went into effect in January, and that’s left people with a lot of questions. What does the tax reform mean for you and what money moves should you make in 2018 to ensure you’re in tip top shape for your taxes?
Here are five tax refund tips to consider to help you save the most on taxes:
Check Your Withholding. With the new tax code, you’re likely in a different tax bracket, which means it’s important to make sure you are withholding the right amount out of your paycheck. (Check your tax bracket here.) One mistake a lot of people make is withholding too much, resulting in a big tax refund each year. But keep in mind, that’s like giving Uncle Sam an interest-free loan, and you’re potentially losing money. Wouldn’t you rather gain interest on that money in your savings or investments all year long rather than getting a fat tax return check every year? On the other hand, if you withhold too little, you’ll owe at tax time. The goal is to withhold just the right amount so you essentially “break even” when you file your taxes. If you expect to earn more in 2018, or have a change in circumstance, such as getting married, having a baby, buying a house or starting a business, revisiting your withholding or estimated tax payments is a must.
You can easily make changes to your tax withholding at any time by filling out a W-4 with your employer. To calculate how much you should withhold, click here.
Increase Your Savings. More than 90 percent of households will see a tax cut this year, and you may have already noticed an increase in your paycheck last month. What do you plan to do with that extra money? Most people are expected to spend their extra income, but this is a great opportunity to bump up contributions to your retirement account. Even saving an additional one or two percent in your 401(k) or IRA can make a big difference down the road. You haven’t had this money to spend before, so you won’t miss it! The ultimate goal is to save 10 to 15 percent of your salary in your retirement accounts, and this little bit of extra can get you on your way.
Take Advantage of Low Interest Rates. The Federal Reserve is expected to raise interest rates at least three times this year. However, with the tax cuts for individuals and businesses expected to create economic growth, those increases could come faster than expected. If you’ve been waiting for the right time to buy a new home, now may be that time. Rising interest rates could push mortgage rates over five percent for the first time since 2010. We also recommend paying off any high interest debt, because credit card companies will likely increase the interest rates you’re already paying.
Ask For a Raise. If the tax overhaul creates the expected economic conditions, we will see increased employment and rising wages. In fact, the unemployment rate could fall below 3.4 percent by the end of this year. That means a hot job market, which could be the prime time to ask for a raise! Do your research. Find out what workers in similar positions in your area are making. Have a figure in mind before the negotiations start and be prepared to back up your requested amount with facts.
Consult a Professional. This may be the most important tip of all. Before you start making financial moves, schedule and appointment to sit down and talk to your financial professional and a tax professional to find out what’s best for your situation. Working with professionals for both your retirement investments and taxes can result in more savings and increased earnings.
Keep in mind that changes in the tax code don’t affect your 2017 taxes you are filing in 2018, but will apply to your 2018 taxes filed in 2019. File your taxes as usual this year. 2017 may be the last year you itemize your taxes, as the standard deduction is nearly doubling (from $12,700 for married couples filing jointly to $24,000.) That means many households will lose their incentive to itemize, starting with their 2018 taxes.
Do you have questions about these tax refund tips, or questions regarding your finances and retirement savings? Contact Dewitt & Dunn today.