Come April, taxpayers will need to file under the new tax rules created by the Tax Cuts and Jobs Act (TCJA) passed in 2017. While you have until April 15, 2019 to file your 2018 tax return, it's usually not a good idea to wait until the last minute. Generally, you should have all the documents you need to prepare your tax return by the end of February.
Why start now?
Here are four reasons why you should prepare your tax return as soon as possible:
You may be due a refund but won’t know for sure until you run the numbers. If you expect a refund, make use of e-filing and direct deposit to get money back quicker. If it turns out you owe taxes, you’ll still have until the filing deadline to pay the IRS. Just remember if you don’t pay your taxes on time penalties and interest charges may apply.
- You’ll know sooner if you’re eligible for tax deductible contributions to an IRA. You have until the April 15, 2019 to make your 2018 IRA contributions. But if you prepare early, you’ll know how much you can contribute, whether the contribution is deductible and whether a Roth IRA contribution is an option. You also have until your return’s due date to make last year’s contribution to a Coverdell Education Savings Account—just remember to tell your account provider that the contribution is for the prior tax year.
- If you have a new addition to your family, you need time to get your child a Social Security number. You must provide a Social Security number on your return for all your dependents, even infants. Don’t wait until the last minute to request a Social Security number from the Social Security Administration.
- You need time to chase down missing records or correct ones with errors. If you misplaced records or haven’t received some of your tax documents, you’ll need to track them down. And if you find errors on any forms (for example, if your pay stub information doesn’t match your W-2), you’ll need time to get them corrected.
Sometimes mutual fund 1099s arrive late
While unusual, some mutual funds can restate their distribution information as late as the end of February.
Normally, you’ll get your Form 1099-DIV anywhere from the end of January to the end of February. But if a fix is necessary, a corrected 1099 may be mailed out later. The chances of this happening are small, so you shouldn’t delay tax preparation just because you might get a restated 1099.
Your Form 1099-DIV should break down your investment income between qualified dividends (taxed at 20%, 15% or 0%, depending on your tax bracket), long-term capital gains and income taxed at your ordinary tax rate (short-term capital gains, non-qualified dividends and taxable interest income). Tax-exempt income should also be separated to show the portion of private activity bond interest, if any, reported to the IRS. Private activity bond interest is subject to the alternative minimum tax (AMT), unless the bond was issued in 2009 or 2010.
2018 tax deductions and credits you should know about
As you prepare to file your 2018 tax return, keep in mind that the TCJA made many changes to the tax code. Many itemized deductions have been limited or removed, and a few have been expanded. Here are a few changes you should know about.
- Larger standard deduction. The TCJA nearly doubles the standard deduction, to $12,000 for single filers and to $24,000 for married filers. About 70% of taxpayers claim the standard deduction, so most taxpayers claiming this deduction will likely benefit from this change.
- Increased child tax credit. The child tax credit doubles to $2,000 per qualifying child and doesn’t begin to phase-out for joint filers until $400,000 of income ($200,000 for single filers). In general, tax credits are better than deductions, so this change should provide a net benefit to most households.
- No more personal exemption or dependent deduction. In the past you received a deduction your spouse, your dependents, and yourself. This deduction has gone away and has basically been replaced by the increased standard deduction and the increased child tax credit.
- Increased charitable contributions limit. The cash donation limit has increased to 60% of your adjusted gross income (AGI) from the prior 50% limit. In addition the 3% limitation on itemized deductions has gone away.
- New limits on your mortgage interest deduction. Your mortgage interest deduction is now limited to $750,000 of indebtedness compared to the prior $1,000,000 limit. However, those who had $1,000,000 of home mortgage debt, prior to 12/15/2017, will still be able to deduction the interest on that loan.
- New limits on state and local tax deductions. There is now a $10,000 ceiling to your state, local, and property taxes deductions. This limit will likely affect higher income households and/or those who live in higher tax states. This change shouldn’t have much of an effect on the average taxpayer, since only about 4% of the population has typically claimed over $10,000 of state and local taxes on their return.
- No more miscellaneous itemized deductions. All miscellaneous itemized deductions (also known as the 2% limitation deductions) have been eliminated. This includes deductions for tax preparation fees, investment advisor fees and unreimbursed job expenses. This change could adversely affect about 9% of taxpayers who typically claimed this deduction.
- New 20% deduction for business owners. The TCJA added a new code section which gives many owners of flow-through businesses a 20% deduction against the income earned by their business. Flow-through businesses generally include partnerships, LLCs, S-Corporations and sole proprietorships. In addition, those who own Real Estate Investment Trusts (REITs) or publicly traded partnerships, such as Master Limited Partnerships (MLPs), are also eligible for this deduction. Be sure to check with a tax professional if you think the deduction applies to you, so you can maximize this tax benefit.
- Education expenses. You may be able to claim a dollar-for-dollar tax credit (or above-the-line deduction, depending on income level) for qualified education expenses incurred by you, your spouse or your children. You may also be able to deduct student loan interest. Check the IRS Tuition and Fees Deduction to see what qualifies.
- Casualty losses. If you live in an area that was federally declared as a disaster area you may also qualify an itemized deduction. You can check the Federal Emergency Management Agency (FEMA) website to see if your county has been identified as part of a disaster area.
Cost basis reporting rules.
Since 2011, financial institutions have been required to report the adjusted cost basis of sold securities to the IRS, including:
- Equities acquired on or after January 1, 2011.
- Mutual funds, ETFs and dividend reinvestment plans acquired on or after January 1, 2012.
- Other specified securities, including most fixed income and options acquired on or after January 1, 2014.
Keep in mind that the reporting rules only apply to the sale of securities purchased on or after the effective dates above. As the taxpayer, you are ultimately responsible for the information on your tax return. So it’s a good idea to save your original purchase and sale documentation—including records of any automatic reinvestments—to make sure it matches the information financial institutions report to the IRS.
Also, even though FIFO (first in, first out) is the IRS default method for both individual securities and mutual funds, most institutions (including Schwab) will report individual securities using the FIFO default method and report mutual funds using the average cost single-category method. Make sure your financial institution is using the accounting method of your choice.
Knowledge is power
Taxes can have an impact on how much money you have available to pay your living expenses and save for the future, so it pays to be aware of the rules and know how they might affect you. Schwab clients can log in to access tax tools and resources, including a cost basis calculator. The IRS is also has resources available to help you understand the rules, including: Publication 17: Your Federal Income Tax and Publication 550: Investment Income and Expenses.
What you can do next
- Make sure that you’re considering the potential tax implications of your investments. Learn more about investment advice at Schwab.
- Talk to a financial professional. Find a Schwab Financial Consultant or visit a branch near you.
- If your tax situation is complicated, you may want to consult a tax professional.