Granted, the tax bill and the media will continue to focus great attention on tax brackets and whether they are lower or higher for middle-class America. However, ultimately what is important is determining your new taxable income, since it is your taxable income that will determine your bracket and ensuing tax.
Hence we need to take great care in shaping (& reducing) that taxable income figure. Most of us earn a set W-2 salary, but in a subsequent post, we’ll discuss the possibilities that exist for self-employed individuals or even salaried individuals who have a side business.
For W-2 employees you could reduce your taxable income figure in 2017 if you immediately tax defer monies into a 401(k) or 403(b) plan. However, you must contact your HR department immediately as amounts need to be deferred before they are earned so it will be it may well be too late now, but it’s worth a try. If it is too late to defer pre-tax savings, you may consider establishing a Tax Deductible IRA, contributions to which will be tax deductible, thereby reducing your taxable income.
The Income Tax Form 1040 is ultimately very logical; you list your earnings and then your investment earnings (which are often referred to as earned income and unearned income) in the first several sections. Next, you detail any adjustments to that income. After the adjustments are tallied, you come up with an Adjusted Gross Income figure (commonly referred to as your AGI), which is carried to the top of the second page of the 1040.
Then historically, and still in 2017, you would have subtracted exemptions and either the standard deduction amount or your schedule A, total presuming the latter was in excess of the standard deduction amount. We’ll circle back to the Form 1040 in a subsequent post, covering all the details.
Two things will change for 2018–there will be no more exemption deduction, and the standard deduction amount has been doubled, otherwise eliminating the need for/luxury of filing a schedule A. If you are one of those taxpayers who has traditionally filed a Schedule A, but whose schedule A total will not exceed the new, increased standard deduction amount–again $12,000 for single taxpayers and $24,000 for married-filing-jointly taxpayers, we may want to take extra deductions this year on your schedule A, which will of course mean expending more money before December 31st. In case you’re wondering, it’s not too difficult a calculation to determine if any of the above will ultimately be beneficial to you or not. In fact, we will be helping a lot of people make these very determinations, so don’t hesitate to call us at 973-706-8924!
Stay tuned for more details on the after-effects of the Tax Cuts and Jobs Act…
As always, to your Empowered Retirement,