3 Possibilities for Extra Tax Deductions!
by Stan Corey
In just a few more weeks, the tax man cometh! Have you already filed your return? Are you expecting a refund? Or are you delaying because you have to write a check?
A question I often get is: Are there any tax deductions I can take now before I file my taxes, or is it too late? The answer always starts with “It depends.”
For most people the opportunity may have past, but if you have self-employment income or your gross income is within certain limits you may still be able to make a contribution to a tax-deductible retirement account or take a special tax deduction for income earned as “qualified business income” (QBI). Let’s explore all three possibilities to see if you might be able to pay a bit less in taxes this year.
Tax-deductible contributions to an IRA can be made up to the time your file your return. For 2018 the maximum amount you can contribute is $5,500. If you are 50-years-old or older you can add an additional $1,000 for a total of $6,500. If you are not covered by an employer-sponsored retirement plan and you have income of at least the amount of your contribution, you can take the full deduction. There is no income limit. However, if you do have an employer-sponsored retirement plan your contributions may be limited based upon your “modified adjusted gross income” (MAGI). For single filers, the income cap starts at $63,000 and phases out at $73,000. For married couples filing jointly, the cap is $101,000 and phases out at $121,000. The amount of the contribution is reduced proportionally for MAGI in the phase-out ranges. However, if you have a spouse who is not covered by an employer-sponsored retirement plan, they can still make full contributions to a traditional tax-deductible IRA without limitations even if not employed. This is sometimes referred to as a “spousal IRA.”
Self-employed people have several choices to make tax-deductible contributions up to the time of filing their returns. It is too late to establish a solo 401(k) but you are able to establish a “simplified employee pension” (SEP) IRA up to the time you file your tax return. If you are able to contribute more than the amount of a traditional IRA creating a SEP IRA may be the best solution. The contribution is based upon your net Schedule C self-employment income. The only requirement is that you do not have employees other than your spouse. The simple calculation is to take 20 percent of your net and see if that amount is greater than what you could contribute to a traditional IRA. If you are under the age of 50, you would need to have net income greater than $27,500 and if age 50 or older you would need to have net income of more than $32,500. If you have significantly higher net income, I would suggest that you explore establishing an individual or solo 401(k) for 2019 as you can shelter up to $56,000 under age 50 and up to $62,000 if you are age 50 or older in 2019.
Note that the IRA or SEP IRA need to be established prior to filing your return and the contribution also needs to be made prior to filing your return.
“Qualified business income” (QBI) is a new tax deduction created by The Tax Cuts and Jobs Act of 2017 and applies to tax years after December 31, 2017. If you have income from a trade or business, including income from a pass-through entity but not a C corporation, you may be entitled to take up to a 20 percent deduction of your QBI. Plus 20 percent of qualified real-estate-investment-trust (REIT) dividends and qualified publicly traded partnership income (PTP). This can be a very complicated calculation if your taxable income (before the QBI deduction) exceeds $157,500 for single tax payors or $315,000 for a married couple filing jointly. If your taxable income is below those limits the calculation can be made using the simplified worksheet found in the instructions to your 1040 tax forms. If your taxable income exceeds the limits, the calculations can get a bit challenging, and I would suggest getting the help of a professional tax preparer to be sure you are getting the maximum allowable deduction. Be sure to review this potential deduction as it can have a major benefit for people in a for-profit trade or business.
With just a few days left before you have to pay your income taxes, be sure to look at all possible deductions and opportunities to reduce the amount you have to pay Uncle Sam.
Photo credits by: Americanbullion.com and nerdwallet.com.
Stan Corey has been a Certified Financial Planner Professional (CFP), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA) for almost 40 years. Though retired from the day-to-day activity of providing financial advisory services, he continues to consult in specialized areas as a financial fiduciary. Stan is a sought-after expert who regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has a reputation for taking complex financial issues and making them understandable to the average person. He likes to say he is a “financial translator.” He has published two books: a novel, “The Divorce Dance,” in 2016, and a non-fiction work, “When Work Becomes Optional,” in 2018. Web site: www.stancorey.com.