By Doug Wright
The first quarter of the year is always a great time to evaluate your household finances and make beneficial changes. This is particularly true in 2018, as the “Tax Cuts and Jobs Act” signed by President Trump in late 2017 will impact your take-home pay this year.
For many, the first priority should be to complete your 2017 tax return. For those receiving refunds, the earlier you file, the faster you receive your refund and the lower your risk of becoming a victim of tax fraud. For those who must pay additional taxes, even if you don’t file and pay until the April 17 due date, at least you know how much you need to plan for.
Turning the focus to 2018, employers will be using new tables to determine how much income tax to withhold from employees’ paychecks, beginning Feb. 15. These withholding tables will incorporate the new tax rates, increased standard deduction and repealed personal exemptions included in the new tax law. If you are likely to use the new higher standard deduction when you file your 2018 taxes ($12,000 for individuals, $24,000 for married couples), you may not need to make significant adjustments to your withholding schedule, unless your income has also changed substantially.
For those individuals who pay higher amounts of mortgage interest and/or state and local taxes, however, the situation is more complex. While the new tax law lowered the tax rates for most people, it also limited the amount of itemized deductions that could be taken. The new employer withholding tables will not take these changes into account, so individuals in this situation will need to look elsewhere for guidance. The IRS has announced that it will have a tax withholding calculator available by the end of February, but it may be wise to seek the help of an expert tax advisor, so that you can effectively plan for the rest of 2018.
Once you have an estimate of your adjusted take-home pay, it’s time to consider how to maximize its benefits. The first step might be to evaluate the amount of taxes you are withholding. If you received a substantial refund in 2017 and are likely to do so again in 2018, you may want to decrease your withholding to increase your immediate take-home pay. Otherwise, the government is benefitting from interest-free use of your money for a 12-month period instead of you. Alternatively, if you are going to pay additional tax for 2017 and are likely to do so again in 2018, you may want to increase withholding to avoid an unpleasant tax surprise and potential penalties when you file.
Next, you might want to consider some tax-saving strategies. For many, the increased standard deduction and caps on itemized deductions may limit some strategies that worked in the past, particularly those involving itemized deductions. However, increasing retirement savings through either a 401(k) or IRA is still generally tax beneficial and a great way to fund retirement, especially if your employer offers a match on your 401(k) contributions. Also, if you’re self-employed, the new tax law may provide some additional benefits, including a potential deduction on “qualified business income.” The rules governing who qualifies for this deduction and how it is calculated are complex and still uncertain, so it makes sense to seek expert tax advice for these situations.
To further maximize take-home pay, refinancing high-interest credit cards or unsecured debt still makes sense for most, even with recent increases in interest rates. If you have a high-rate credit card, you may want to consider looking for a credit card with a low-rate balance transfer option, or paying off the balance with a home equity line of credit (HELOC), which could save hundreds of dollars a year. Keep in mind, however, that interest on HELOCs is not generally deductible under the new tax law.
Finally, setting up automatic transfers into tax-advantaged savings vehicles, either directly from your paycheck or from your checking account soon after your paycheck is deposited, can help develop strong savings habits and minimize the opportunity for funds to be spent elsewhere. In addition to the retirement savings options noted above, 529 plans are also tax-advantaged and can now be used for qualifying educational expenses for all ages, not just college. The many changes created by the tax reform act will impact your financial situation. Taking a proactive approach to evaluating the impacts and adjusting your financial habits now will help produce both short- and long-term financial benefits.
Doug Wright is chief financial officer at Mission Federal Credit Union, a not-for-profit financial services organization with 30 local branches and more than 224,000 customers. It is the largest locally based financial institution that exclusively serves San Diego County.