Top 3 Tax Tips from the 2018 Tax Season

Well, another tax season is in the bag!  While we decompress here at Edgar and Edgar, I thought it would be helpful to share our top three tax tips from the 2018 tax season.

1. Change your W4

While almost every tax return we completed this year saw a smaller effective tax rate (total tax divided by adjusted gross income), many of our clients were shocked to see smaller refunds and even several tax due bills.  So how did this happen?  A simple Google search of “Smaller Refunds”  will pull up a plethora of articles about smaller refunds for 2018.  Essentially, when the withholdings tables were released for 2018, the IRS appears to have been very aggressive in reducing withholdings.  The idea was to increase Americans’ paychecks as much as possible. 

While bigger paychecks are great, most of our clients like that big refund.  If you like your big refund, there’s something you can do.  We’re recommending to our refund-hungry clients that they change their W4 to either withhold at a more aggressive filing status, claim fewer allowances, or have extra money taken out.  In box 3 of the W4, you can elect to be treated as single, even if you are married filing jointly. In box 5 you can elect to claim fewer allowances.  And finally, in box 6 you can have extra money taken out each paycheck.  All of these W4 modifications will conspire to reduce your paycheck and increase your refund.

It is important to remember how much you pay, or get back, is really a function of how much you paid in.  In the illustration below, you can see your total tax is represented by a bucket.  How much you pay in during the year is illustrated by water in the bucket.  The bucket can remain the same, but if you pour in a lot of water you overfill the bucket and get a refund.  If you don’t fill up the bucket, you’re going to owe.

2. Unreimbursed business expenses

Up until 2018, if you were a W2 employee and you had work expenses your employer was not reimbursing you for, you could write those off to the extent they exceeded 2% of your Adjusted Gross Income (AGI).  The entire “2% of AGI” deduction bucket has been eliminated by the Tax Cuts and Jobs Act through the 2025 tax year.  So, what’s that mean?  Well, if you are a W2 employee and you have business expenses that don’t get reimbursed, you won’t be able to use these expenses to lower your tax bill.  Employees that have business expenses should talk to their supervisor and see if they can get reimbursed for these out-of-pocket expenses.

3. Have IRA management fees come directly out of your IRA account

In addition to unreimbursed business expenses getting nixed, investment-related fees (with the exception of investment interest) are no longer deductible under the Tax Cuts and Jobs Act through 2025.  However, if you’re paying investment fees, such as trading and management fees, on your Individual Retirement Accounts (IRAs), you can still reduce your eventual tax burden by having those fees taken directly out of your IRA, as opposed to paying them separately.  IRAs are taxed as distributions are taken from the account.  By having fees deducted directly from the account, you are reducing the amount in your IRA account and therefore reducing the tax you will eventually pay on the smaller balance.  If you are paying an investment advisor, broker, or other service providers to manage your IRA, ask them if you can pay your fees directly from your IRA.