I kept a list of questions I got asked the most during the 2019 tax season, and while most were about the new tax laws, a few stood out that I wanted to address here:
- Why are my state taxes limited to $10,000?
With the passing of the new tax laws, the SALT taxes are capped at $10,000. SALT is State and Local Taxes, so the amount paid in State Income Taxes, Local Taxes (SDI), Real Estate Taxes, and the VLF portion of DMV registrations. This definitely hit states like ours hard, as we have a high state income tax. The only benefit to this cap is not deducting as much in taxes means the Alternative Minimum Tax might not be applied.
- Why did I owe more taxes this year compared to last? I thought the taxes were lowered?
The tax brackets were lowered, but there were a lot of tax changes, so it’s hard to give a blanket response that applies to everyone. On average, most people saw a decrease in their overall tax liability in 2018 compared to 2017. However, with the tax law changes came a change in federal withholding in paychecks. So, while the tax liability was lower, the amount withheld in federal taxes was also lower, meaning less of a refund, or owing.
- How can I lower my taxable income in the future?
The easiest way to lower taxable income is to take advantage of the retirement plans your company offers. In 2019, you can contribute $19,000 of pre-tax funds to a retirement account, which directly lowers your taxable income. These funds are held, though, and there is a hefty penalty for withdrawing early. In addition, the HSA is an excellent tax savings vehicle. Family’s can contribute $6,000 of pre-tax funds, which can cover any medical expense. At the end of the year, any funds remaining are kept in the account for future use. This account can continue to grow and be used for medical purposes until age 65, at which point funds can be withdrawn for any reason without a penalty.