Personal Finances - 2018


Let’s Line-up Our Ducks for 2017 Tax Preparation

By Mo Vidwans

While Congress is going through its gyrations for passing the tax law and there is assumption that it will be signed by the President before the year is over, let us focus on the past year, 2017, since that is what we have to work with for now.

The new Tax Law, when passed and signed, will be effective for either 2018 or 2019 depending on how far stretched and deep the actual changes are. There is a lot of work to be done by the regulators, once the law is passed, and it does become a very taxing (no pun intended) job because of the fact that the law is only the intentions, the actual details are worked out by the regulators and it does take a lot of time and efforts. My guess is that some changes would be incorporated in 2018 but the majority of them would be for 2019.

Let us come back to our getting ready for filing for 2017. Not much has changed for us for this past year with some exceptions and I will point those out as we go along.

Since we are already in 2018, aligning ourselves with the right strategy to reduce taxes legally is difficult now. Let us see what other preparation we have to do so that we will be ready for filing our tax forms at least by April 17.

Incomes

All incomes have to be accounted for and reported. I get this question a lot that since 'I have not received any form 1099 or W2 or similar do I have to file and show that as income'. The answer is unequivocally and without a doubt 'Yes'. If you know you earned that income but you do not have the paperwork to support it, you must still include that income. Some interest income, gambling winnings, temporary wages, unemployment compensation, income from small business are some of the examples that get ignored and not reported. You would rather be making a mistake of admission by reporting it than that of omission and not reporting it. IRS does not look at such purposeful omissions kindly.

Taxable interests, ordinary and qualified dividends, taxable refunds, credits or offsets of state and local income taxes, alimony received, small business income or loss, are some of the examples for which you have to gather your documents and report properly on your 1040 form.

One small note about capital gains on which you may have to pay capital gain taxes. If you sold stocks, bonds, mutual funds or ETFs you will have to calculate your long term and short term gains and report those. Also mostly forgotten is if there are carryover losses from the previous year, which would help you to reduce income.

Adjustment to income

Many of us have HSAs now because our employers encourage us to have one. And it is usually a large amount for a family. Any contributions you paid with your after-tax money are deductible. Don't include any insurance premiums paid by an employer sponsored health insurance plan unless the premiums are included in your W2.

Educator expenses are still deductible but there is an upper limit and also income limit. Moving expenses are deductible but you have to follow the guidelines. Alimony paid, penalty on early withdrawal of savings, IRA contributions as long as you earned that money and student loan interest deductions are all possible deductions. Many of these are likely to disappear when the new law becomes effective. Tuition fees are deductible to reduce income but you are probably better off taking that as education credit on line 50 by filling form 8863. There are limits for all such deductions.

Tax credits

Most common one that is easily forgotten is the “foreign tax credit." If you own a foreign stock, either as ADR or otherwise, and have dividend income on it, you have already paid foreign taxes on the dividends. USA has reciprocal arrangements with many countries and such taxes paid to the foreign country can be claimed as tax credits. Many folks of Indian origin try to bring their inherited estate from India to USA; this will be a good example of where you will have to consider capital gains taxes and take credit for it.

Credit for child and dependent care expenses, retirement savings contribution credit, child tax credit are some of the other examples where you reduce your taxes, dollar for dollar, by claiming these credits. There are limits on income and maximum credits. It is aimed at low-income taxpayers and you have to have paid or owed taxes to take the credit.

Itemized deductions

This area will be affected grossly by the new impending law but for now for 2017 there is not much change. One major change for seniors is that they had a special 7.5 percent deduction of their AGI for calculating medical expenses that can be used for itemizing. Now it is 10 percent across the board.

Often we don't take receipts for the household items we donate; that is a mistake. A word for the wise. You can have very many legal deductions but you have to keep your supporting documents ready and in good order.

One example of what is generally forgotten is the deduction for mileage for all medical services like going to the doctor or x-ray or any kind of doctor-requested treatment, or even going to the drug store for a prescription, etc. The other one is gambling losses. If you have shown in income section any gambling winnings then you can deduct the losses up to the point of your winnings in this section. But unfortunately you have to have enough material to be able to file for Itemized deductions before you can claim them.

There is lot to do. Get your thoughts together, paperwork in order, and request for it if you don't have it and take the maximum deductions that the law allows. Laws, like everything else in life, are changing but we just don't know what and when as of yet.