En español | Filing season doesn't arrive until spring, but you'll want to act soon to take advantage of provisions in the sweeping tax law passed in late 2017. Experts say these are the biggest changes affecting taxpayers 50 and older and the steps you need to take before year's end to get your biggest benefit.
A boost for the self-employed
Starting in 2018, many independent contractors and small-business owners can get a 20 percent federal tax deduction on their business income. In other words, they’re liable for taxes on only $80 of every $100 they make. (The deduction starts phasing out if their total taxable income surpasses $157,500 if single, or double that if married and filing jointly.) Other math is involved, but the probable upshot is lower taxes if you become, or remain, a freelancer. For example, a self-employed architect making $40,000 a year would see her taxes cut $672, the Tax Foundation calculates.
Do this now: Start the business you always dreamed of
Got a hobby or talent you’d like to monetize? Now’s a great time to try. You might also invest more in a business you’re already running, or, if you’d like a lighter work schedule, switch from employee to freelancer. In terms of taxes, “you can work the exact same job and be way better off being an independent contractor,” says Stacy Johnson, a CPA and president of Money Talks News.
A higher bar for medical deductions
Under the new bill, taxpayers this year can deduct unreimbursed medical expenses that exceed 7.5 percent of their adjusted gross income. Beginning in 2019, however, that figure rises to 10 percent.
Do this now: See your doctor and get your meds
If your medical expenses are already near 7 percent or higher, and if there’s something you want a doctor to check out, you might go now, says Ann Brownholtz, senior tax adviser for the financial advisory firm the Colony Group. You could also pay now for future medical expenses such as prescription drugs or medical equipment, says Johnson.
Less of a break for state and local taxes
In past years, people could deduct state and local taxes (SALT) they paid, such as income and property taxes, on their federal return. But now those deductions are limited to $10,000 per return ($5,000 for married people filing separately), no matter how much tax you pay locally. That could mean a tax bite for some wealthy folks in high-tax areas. For example, the H&R Block Tax Institute estimates that a New Yorker making $500,000 a year would pay $6,300 more under the new law, mostly because of the SALT change.
Do this now: Stay calm—and maybe consult a professional
Although this news looks bad if you pay a lot of SALT, it probably isn’t, says Brownholtz. That’s because, for most people, the deduction’s loss will be offset by other tax code changes, including an easing of the Alternative Minimum Tax. Talk to your accountant if your wealth resembles that of the hypothetical New York executive, and delay any panicked plans to move to a low-tax state.
A jump in the standard deduction
The biggest change in the tax law is the near doubling of the standard deduction to $12,000 for single filers and to $24,000 for married couples filing jointly. People 65 and older filing singly can deduct another $1,600, while couples filing jointly are allowed a $1,300 deduction for each spouse of that age. For tax year 2016, 30 percent of filers itemized, rather than taking the standard deduction. But the higher standard deduction is expected to result in many fewer itemizers, says H&R Block’s Gil Charney.
Do this now: Stop collecting all those darned receipts
Take a look at your 2017 return. If your state and local taxes (up to $10,000, remember?), charitable contributions and medical expenses don’t come close to your household’s standard deduction this year — and if your deductible expenses haven’t shot up since last year — don’t sweat assembling all the paperwork for those outlays this year.
Different Rules for Alimony
Under current regulations, an ex-spouse paying alimony gets to deduct those payments on his or her return, and the ex receiving it has to declare it as taxable income. But for divorce settlements finalized Jan. 1, 2019, or later, the payer cannot deduct the alimony, while the recipient does not have to claim it as income. “This is a big one,” Charney says.
Do this now: Splitting up? Rerun the numbers
If you can’t finalize your divorce by New Year’s Eve, work with an accountant or certified divorce financial analyst (yes, that’s a real thing, and it’s legit) to equalize the impact on both spouses, says Carol Lee Roberts, president of the Institute for Divorce Financial Analysts. Lili Vasileff, author of Money & Divorce: The Essential Roadmap to Mastering Financial Decisions, also suggests considering alternatives to alimony, such as covering certain medical and educational costs for an ex-spouse or child, which may be tax deductible for the payer.
New Savings for School
Starting this year, families have more ways to use money in 529 savings plans — investment accounts that can grow tax-free and from which money can be withdrawn tax-free to pay for education expenses. Instead of using that money only for college or graduate school, parents and grandparents can now spend a total of $10,000 per child each year toward K-12 tuition expenses. One catch: While many states give residents state tax deductions for 529 plan contributions, some states are revoking tax breaks when money is used for these newly allowed expenses.
Do this now: Open or add to a 529 plan
Whether or not the child in your family could use the money before college, 529 plans are a great way to save for his or her education. For a list of low-expense plans, search online for “NerdWallet 529.” If you plan on using the money for secondary school rather than college, check your state’s rules. And because you’d need the money earlier than you would for college, invest your 529 more conservatively, suggests Brownholtz, perhaps putting slightly more in bonds and slightly less in stocks.