As the days of 2018 are winding down, so are the days in which you can lighten your next tax bill.
The largest change to federal tax code in a generation was made late last year when Congress passed the Tax Cuts and Jobs Act. With dozens of changes to the federal tax code, many taxpayers and small-business owners may see changes to their tax bills this year.
Many tried and true last-minute strategies for reducing tax burdens remain options.
Under IRS guidelines, individuals over age 18 can contribute up to $18,500 to 401(k) plans in 2018. Individuals over age 50 can also contribute up to an additional $6,000 to 401(k) plans.
Jeremy Morris, a certified public accountant with Williams-Keepers Certified Public Accountants & Consultants, said making contributions to 401(k) plans and individual retirement accounts is still one of the best last-minute ways to reduce taxpayers' yearly income tax burdens.
"If you're an employee participant in a retirement plan, there is still time to make contributions into that plan," Morris said.
Small-business owners without current retirement plans for themselves or their employees can still set them up and make contributions through the end of the year, which would reduce their tax burden, he said.
Making charitable contributions is also another way to reduce income tax burdens at the last minute, Morris said. Generally, contributions to charitable organizations can be deducted up to 50 percent of adjusted gross income, according to IRS guidelines.
Before last year's tax bill passed, interest paid on home mortgages up to $1 million could be deducted. Now, only interest on home mortgages of up to $750,000 can be deducted.
Under the latest tax code changes, Morris said, many taxpayers who previously itemized will now take the standard deduction.
In basic terms, the standard deduction is an amount all Americans may subtract from their income before paying their income tax bill on the amount left after that. About 69 percent of taxpayers take the standard deduction, according to Tax Foundation, a conservative-leaning think tank.
Under the tax overhaul, the standard deduction doubled from about $6,000 for individuals to $12,200 for the upcoming tax year, according to the IRS. Married couples who file jointly will see the standard deduction increase from about $12,000 to $24,400 this year, according to IRS guidelines.
A handful of taxpayers who previously took the standard deduction may now itemize, Morris said.
"People may not be able to exceed that standard deduction threshold (by itemizing), so they would be more likely to take the standard deduction," he said. "Assuming a similar situation in 2017 and 2018, we'll see more people taking the standard deduction."
The tax overhaul restructured the seven income tax brackets and generally decreased them by 3 to 4 percent. A July report by the Government Accountability Office found about 20 percent of taxpayers, or about 30 million people, will owe money to the IRS. About 75 percent of taxpayers will have too much money withheld, according to the report.
Employees should check their W-4 forms, which taxpayers use to indicate how much money they want withheld from paychecks, Morris said. Individuals who previously itemized may see a greater reduction in the amount withheld from their paychecks than the reduction in their tax position, he said.
"That has the potential to surprise a significant number of people because the withholding tables don't match what their actual reduction in tax is going to be in their situation," Morris said.
Employees may still be able to make changes to their withholdings before the end of the year or make an estimated fourth quarter tax payment by mid-January to correct any anticipated problems, he said.
Last year's tax bill also makes several changes that could affect small-business owners.
The tax rate for C Corporations dropped from 35 percent to 21 percent. Most small businesses are set up as closely held S Corporations, sole proprietorship or partnerships, Morris said. Under these ownership structures, that income ends up passing through to the owner's personal income tax returns.
So, most small businesses are subject to the top personal income tax rates. In 2019, individuals in the top income tax bracket with incomes greater than $510,300, or $612,350 for married couples, will pay a federal income tax rate of 37 percent, according to the IRS. Individuals making $204,100, or married couples making $408,200, will pay the second-highest rate of 35 percent.
Under the tax overhaul though, business income from partnerships, S Corps., trusts or estates may be subject to a 20 percent deduction, according to IRS guidelines. Morris said most pass though entities will pay an effective rate of just under 30 percent.
"That pass through deduction tried to even the playing field even more between those (C Corps. and pass through businesses), Morris said.
The tax overhaul also set a cap of $10,000 on a previously unlimited itemized deduction for taxes paid on state and local income tax deductions. Changes to the SALT deduction will mostly impact taxpayers in high-income states such as California and New York.
Still, Morris said small-business owners in Missouri are concerned about this change because many have personal property taxes greater than $10,000. The impact of the change in Missouri will be smaller than in higher-income states, but will still be significant, he said.
"That's a real issue," he said. "That deduction is going to be limited and (small-business owners) will be impacted by the limitation of that particular itemized deduction."
A small percentage of taxpayers who do not get the benefit of some of the changes may see tax rates go up, Morris said. Even so, most individuals and small-business owners will generally pay lower income tax rates this year.
"It is highly situation specific," he said. "What's going to vary is the level."