If you found yourself feeling slightly hosed this tax season now is the time to assess your situation
Looks like we made it. Look how far we’ve come my baby!
The first tax season since the passage of the Tax Cuts and Jobs Act has (TCJA) come to an end. Though we haven’t come THAT far and you are, in fact, not my baby, we do have a much better idea of how the TCJA plays out in practice, the inter-mingling’s with state tax changes in response to the TCJA, and most importantly, what that means to you and/or your business.
If you found yourself feeling slightly hosed this tax season now is the time to assess your situation to ensure the same doesn’t happen next year. Here are four things to consider.
Examine Your W-2 Withholding
Federal income tax withholding changed after the passage of the TCJA. While it may have only been a small amount each paycheck, over the course of a year, it adds up. Many taxpayers were unpleasantly surprised to find out they owed more than expected as a result of lower income tax withholding. To change your withholding you will have to fill out Form W-4.
Bunching Charitable Contributions
As a result of the $10,000 deduction limit for state and local income taxes, many taxpayers who had itemized deductions in past years found themselves a greater benefit in taking the standard deduction. If you typically donate a considerable amount to charity every year, consider bunching those contributions. By contributing to a donor-advised fund you can dictate those funds be dispersed to organizations of your choice over a span of years while taking the full deduction in year 1. This may allow you to receive a tax benefit for your altruism that you would have otherwise lost under the TCJA.
Optimize Qualified Business Income
Under the TCJA, you can now deduct up to 20% of your qualified business income. This, of course, has its limitations. There are specific strategies you can employ, however, to optimize this deduction. For example, a business owner who is paid W-2 wages from his/her business may gain a higher deduction and tax benefit from either increasing or decreasing wages.
Don’t Forget the Connecticut Pass-Through Entity Tax
In response, to the state and local income tax deduction outlined by the TCJA, Connecticut imposed a new tax on pass-through entities. If you have been paying estimated CT taxes at the individual level we should look at paying those through the business. You are eligible for a tax credit on your CT individual tax return for doing so.
These are simplified recommendations on only a few of the most impactful things to look at moving forward. Given the complexity of the tax code we recommend speaking with a tax professional to discuss some of these items. We are almost half-way through the tax year already and April 15th, 2020 will be here before we know it. Don’t wait to start preparing. Act now. You will thank us later.