FRANKLIN TWP.  - NJ - The Tax Cuts and Job Act (TCJA) was the biggest overhaul of the tax code in 32 years.  It was devised to simplify the tax code.  But there was nothing simple about the tax changes.  The original bill was 500 pages and the final 187.  There were over 100 changes to the tax code overall.  The IRS had to make changes to 400 forms, which is double the amount they usually make.  

Rates have decreased with the top individual rate now at 37% down from 39.6%- Overall the individual tax rates have come down for all tax brackets.  There are still 7 tax brackets.  The old 15% tax rate is the new 12% and the old 25% is the new 22%.  Also, the income ranges for each tax bracket have widened.  Ideally you could make more money and be taxed at a lower tax rate.

The tax brackets and tax rates for 2019 were as follows:

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2019 Tax Brackets

Tax rate

Single filers

Married filing jointly or qualifying widow/widower

Married filing separately

Head of household

10%

$0 to $9,700

$0 to $19,400

Up to $9,700

Up to $13,850

12%

$9,701 – $39,475

$19,401 – $78,950

$9,701 – $39,475

$13,851 – $52,850

22%

$39,476 – $84,200

$78,951 – $168,400

$39,476 – $84,200

$52,851 – $84,200

24%

$84,201 – $160,725

$168,401 – $321,450

$84,201 – $160,725

$84,201 – $160,700

32%

$160,726 – $204,100

$321,451 – $408,200

$160,726 – $204,100

$160,701 – $204,100

35%

$204,101 – $510,300

$408,201 – $612,350

$204,101 – $306,750

$204,101 – $510,300

37%

$510,301 or more

$612,351 or more

$306,751 or more

$510,301 or more

Source: Taxdebt.org

In the USA we pay taxes based upon a marginal tax system.  So for a married filing jointly couple making $80,000 in 2019, the first $19,400 would be taxed at 10%, the next $59,550 at 12%, and the remaining $1,050 taxed at 22%. 

Let’s look at 7 Ways to Reclaim Your Money and keep more money in your pocket. 

Bracket Management – There will be occasions where you expect high income years.  To the extent that you can recognize income in lower income years, you can maximize the money you keep since you will pay a lower tax rate.  With this strategy you are not eliminating income, you are just deferring income to a later period.  This requires crucial planning to determine when and how the deferred income will be taxed.  If done incorrectly, this could result in you paying higher taxes in the future.  So be sure to work with a qualified CPA to implement this strategy.

Paycheck Calculator & Pay Estimated Tax Payments- Perform a paycheck checkup using the IRS tool at https://www.irs.gov/paycheck-checkup .  Not having adequate tax withheld can certainly mean a big tax bill and even a penalty at tax time.  You might prefer less tax withheld up front and receive more in your paycheck which may mean a lower refund or an unexpected tax bill.  Using this tool will help you find the optimal balance.

Make Estimated Tax Payments if you are a business owner, self-employed person, or do freelance or contractor work and receive a 1099.This is untaxed income and will more than likely result in a tax obligation.You will want to make quarterly estimated tax payments to ensure you don’t get hit with a surprisingly large bill when you file your tax return.This is required if you expect your obligation to be at minimum $1,000.

Bunch Itemized Deductions – Due to changes in TCJA, most taxpayers who previously itemized their deductions on their tax returns will now take the standard deduction. This is simply due to the almost doubling of the standard deduction for all filing statuses from $12,700 pre-tax reform to $24,400 for MFJ for 2019.  This is also due to the SALT Deduction Limitation to $10,000, $5,000 MFS on property and state/local income taxes (except for taxes incurred in trade or business) Not applicable to taxes in your business or on real estate.  There will be situations where you can start to itemize every 2-3 years by bunching and timing medical, charitable contributions, and other itemized deductions.  Speak with your CPA to help plan out this process.

Watch Holding Period for Stock- Hold on to stocks for at least one year and one day prior to selling.  Many taxpayers are selling stocks much too soon which is resulting in a hefty tax bill.   In order to get the favorable capital gains tax rate which is roughly 0% if in the first two tax brackets and 15% if in the 22-35% tax bracket and 20% if in the 37% tax bracket, you must hold on to the stock at least one year and one day prior to selling.  Otherwise you will pay higher taxes since you will be taxed at ordinary income tax rates.   For example, let’s say you are MFJ in the 24% tax bracket, and you sell qualified stock that you held for 360 days at a gain, your gain would be taxed at 24% (ordinary income tax rate).  If you held the same stock for at least 366 days, your gain would be taxed at only 15% (capital gains rate).  That is a 9% tax savings! A little planning can go a long way to ensure you keep more of your money in your pocket.

Contribute to Pre-Tax Retirement Plans - Contributing to a Retirement Plan such as a 401-K, 403-B, or 457 will reduce your taxable income and effective tax rate.  Maximum contribution rates for 2019 was $19,000 if under 50 or $25,000 if over 50.  You can also contribute to an IRA or SEP IRA (if a business owner).  Maximum contributions to an IRA for 2019 are $6,000 if under 50 or $7,000 if over 50.  You will pay less income tax when you contribute to your pre-tax retirement plans and this will allow you to hold on to more of your money. 

Let’s say you have a 401-k at work but would like to contribute to an IRA.You are single and contribute $6,000 to an IRA and your AGI with modifications is less than $64,000 (Partial deduction if AGI with modifications is between $64,000 and less than $74,000-No deduction if income is greater than $74,000) you would be entitled to the full deduction of $6,000 on your tax return.

Since you are in the in the 22% tax bracket, the $6,000 deduction would result in tax savings of $1,320 ($6,000 *.22= $1,320).Although you made a contribution of $6,000, you received a tax savings of $1,320, therefore you real dollar cost were $4,680 ($6,000 -$1,320= $4,680) You have until April 15, 2020 to make a contribution to an IRA for 2019.

Qualified Business Income Deduction – This deduction as known as Section 199A was implemented with TCJA and commenced in January 2018.  If you are a sole proprietor, the owner of a partnership, S-Corp, and certain trusts, you may be eligible for a deduction up to 20 percent of your qualified business income.  This deduction is not available to C- Corporations.  This strategy alone could mean big bucks for you.  Ask your CPA to assist you with the implementation.

ROTH Conversions- Converting funds from an IRA to a ROTH IRA could mean more money in your pocket in the future.  This is true if you are in a much lower tax bracket than you plan to be in your retirement years.   Recall a ROTH IRA allows you to receive earnings and distributions tax free provided 1) You are at least 59 ½ 2) Held the account for 5 years.   You can always withdraw contributions (the money you put into ROTH) tax free.  While an IRA grows tax deferred which means the funds are taxed upon withdrawal.

Carletta Beckwith CPA LLC is a firm that provides premiere income tax preparation, tax planning, and financial planning services. Carletta Beckwith is a licensed CPA and CFP® and shares her extensive industry knowledge to deliver superior customer service and personalized attention to her clients.  To learn more about the services she provides visit www.beckwithcpa.com.  You may email her directly at carletta@beckwithcpa.com.

IRS Circular 230 disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency. 

Disclaimer: Nothing in this document should be relied on and you should seek professional advice if you need tax or financial planning information or advice.  This publication should not be a substitution for personal tax advice as every tax situation is different.  You should obtain personal tax advice from a Certified Public Accountant or other tax professional to address your specific tax needs.  You should seek financial planning advice from a financial planning professional or CFP®.

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