Lions, Tigers, and Taxes – Oh My! Thoughts on 2018 Tax Planning

Ah, the taxes of a breadwinning mom. As a stifled accounting major, who used to dream of becoming a CPA but ended up working in IT, tax season is one of my favorite times of year. Not only because I get to see what my tax situation is like for the year, but because it’s now that I can check and see what I can optimize or tune for my taxes for next year.

And oh my, are there a lot of tax changes this year. I’m going to take a look back at my 2017 taxes, and a look ahead to 2018. I’ll also tell you some funny/amusing/entertaining stories about some of my past tax times so this isn’t just another dry tax article. Plus I’ll give you all my favorite recent articles and resources on the tax law changes so you can do your own detailed tax assessment, because taxes are fun!!!*

*Disclaimer – you may not find your taxes to be fun. This statement is not a guarantee of fun, entertainment or joy. If you find your taxes to be duller than dishwater, CMO is not responsible. Please write a thank-you note instead to either Abraham Lincoln or the Congress of 1909.

Assessing My 2017 Taxes

Doing your taxes is a great time to take a nice, hard, long look at your income and tax situation. It changes from year to year, with changes in your life, in the tax law, and in your income or investments. So what’s right for your tax situation one year could be completely wrong the next.

As some examples, here are stories of different points in my tax life that I find memorable:

• Losing Credits: For many years after my oldest son was born, my family qualified for the tax credit for retirement contributions. I remember that when I couldn’t get it anymore, I was both sad (to lose out on the credit) and happy (because our income had gone up)
• That Time A CPA Messed Up My Taxes: I hired a CPA for literally ONE YEAR, the year my husband almost died of septic shock. I had to take a Roth IRA distribution that year in order to cover some expenses, which should have been fine – I had more than enough in contributions to cover. This “CPA” (using quotes here) completely messed up my taxes and treated it as a Traditional IRA distribution, complete with taxes and penalty owed. I immediately sent it back to her with the appropriate information from the tax code on how you’re supposed to treat a Roth. My taxes swung from owing over $2k to being owed back several hundred dollars. Ever since, I’ve only done my own taxes.
• The Time I Owed Over $7k: Here’s a perfect example of the issue with not assessing your tax situation every year. Back in 2014, I had wrapped up my MBA and didn’t have any educational expenses that year, and I had also refinanced into a 15 year mortgage. Guess what that did to my deductions? That’s right, took them way down. PLUS I started phasing out of some of the deductions at the same time. I was shocked when I did my taxes that year, but luckily had savings to cover the shortfall. It taught me to not lose track of my annual tax assessment, and to remember to look ahead to next year.

So you can see why I’m a big fan of tax assessment and planning.

Tax Assessment – Checking In On Your Financial Situation

Tax time is a great time to see your progress from last year. What do I mean? Here’s a few examples for some of the more common tax situations.

–Income. What’s happened to your taxable income since last year – has it gone up, gone down, or stayed the same?

–Interest, Dividends, and Capital Gains. Are you earning the same as you did last year? More? Less? Hopefully the answer here is more. Although the past few years of interest rates did mean my answer was “less” in the interest category for a while.

–Retirement plan contributions. Did you max out your contributions last year – if that’s a goal for you? How about Roth and Traditional IRA’s? Or did you leave money on the table? Remember too, you have until April 15th to make prior year IRA contributions. For 401k/403b/etc. you’ll just need to wait until next year (which is now this year)

–College. If you have kids and your state offers a credit for 529 plan contributions, are you taking advantage of or maxing out that credit? If you have kids in college, or if you/your spouse are taking courses, are you getting the American Opportunity Tax Credit or the Lifetime Learning Credit?

–Charitable giving. Did you increase your charitable giving from last year? Do you have things around the house you wanted to donate, but never quite got around to it?

–Other. If you own a business, obviously you’ll be looking at your business income and expenses for this year, and compare them to last year. And if there are any “unusual” income, expense, or tax circumstances that don’t happen every year, you’ll want to make sure you’re familiar with the rules and situation.

I enjoy comparing this year with last year, to see what’s changed, what’s stayed the same, and where I could have done better. I think of it almost like an annual report for my tax situation.

Tax Planning – What Will Your 2018 Taxes Look Like

This is where things get interesting this year. There are so many changes in 2018 there’s just no way I can cover them all – nor would I want to try. After all, I’m just a hobbiest financial geek, not a professional. So instead here’s an excellent professional write-up of all the tax changes that likely impact you from Mr. Michael Kitces. It’s long, comprehensive and detailed-my favorite kind of tax article.

So what’s changing here at CMO central? Many things.

Feeling SALTy – I happen to live in Connecticut, one of the states planning to sue the federal government for its right to continue to impose high taxes on me. Thanks state! Yes I am over the SALT limit ($10,000 in state and local income taxes), so yes, this cap impacts me. And this leads to…

Standardizing – I’ve been itemizing since I first bought my condo back a few months before I turned 20. For literally my entire adult tax life, I’ve itemized. That’s about to change next year – with the SALT cap combined with ever-decreasing mortgage interest from that 15 year mortgage I took out five years ago, I’ll be taking the standard deduction for the first time ever. The deduction will be more than I get from itemizing in 2017, so I won’t be complaining. HOWEVER….

Personalizing – Also called the loss of the personal exemptions. When I look at my old itemized deductions plus personal exemptions vs. the new standard deduction, it’s pretty much a wash.

Lower Tax Rate – We’re pretty much all going to be in a lower bracket.

Child Tax Credit – I was above the start of the phase-out for the old child tax credit. Now with the new one, I’ll be able to capture it. As the mother of three, this is certainly a plus.

All in all, I expect my taxes to go down, but I’m not going to go out and spend that money. First of all, the tax changes are set to revert back in 2025, so they may ago away (although often at least some are made permanent at some point). And secondly, I know my goals. That money is going straight to killing that mortgage.

I’d recommend you also perform your own personal tax assessment – not only so you know what changes to expect, but so you can adjust your withholding accordingly, if necessary. After all, you want this money to go toward your goals, not the governments.

I Want To Hear From You!

What in your tax life has been memorable? Are you also excited about doing your personal tax assessment, or are you dreading it? Let me know in the comments!

Stay tuned for later this week – I’ve got my first Women on FIRE interview (you won’t want to miss it!) and on Friday I’m talking all about kids and taxes. See you soon!

Interested in making sure you protect your tax identity? Make sure to read this. Want to be financially free? You can see all my financial freedom strategy and articles here.

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