*** If you care to learn deeply about the tax code, I have begun writing a book which contains everything I know on the topic. The book discusses wealth accumulation strategies, of which tax minimization is a key component. The (imperfect and incomplete) draft can be downloaded here.***
Today I noticed that Turbotax has updated their free Taxcaster software to account for the new tax law changes: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
It matches dollar for dollar with my estimated 2018 spreadsheet. If you have issues with my sheet, report them to me and I’ll update it accordingly.
I’d encourage every person to spend a few minutes to forecast their new tax liability for 2018. Play around with my spreadsheet as well. Calculate your effective marginal tax rate (I talk explicitly about how to calculate that in my EITC post). After doing so, figure out whether you want to contribute to Roth or Traditional IRAs/401ks going forward. Remember that you want to choose Trad when MTR_today (federal + state) > MTR_future (federal + state) and Roth otherwise.
For moderate income families with many children, EITC hacking is alive and well. Such families can now get humungo amounts of free money on $0 withholdings. The upside to doing so has grown by about $4k this year, depending on family size of course.
Here’s the rough snapshot of what will happen to my taxes:
After playing around in Taxcaster and my spreadsheet, I’d encourage you to look through your payroll withholdings and see if you are on track to hit your federal tax liability in 2018. It’s foolish to over-withhold income taxes, so don’t do it. It will take you 10 minutes on Taxcaster and your paystub to see if you’re on track. If you’re overshooting, then claim more exemptions. The optimal refund size is $0. People who are bad at math rejoice at a large refund after having over-withheld and given the government an interest free loan for 4-16 months. Don’t be like these people. If you irrationally like giving out zero interest loans, I’m happy to provide that service to you. I’ll take your money, pocket the interest, then return it to you in 16 months.
Perhaps most importantly I’d encourage everyone to take out a pen and paper and try to calculate their 2018 tax liability by hand. With the (effective) elimination of AMT and itemized deductions for most Americans, this should be a trivially easy activity. Going through this exercise will empower you to make informed decisions about tax minimization going forward.
An important thing to realize with any tax strategy is that all maneuvers must be completed by Dec 31, with the exception of IRA contributions which can be made up through tax day (mid-April). Now is the time to plan to minimize this year’s taxes, not next April when it is too late.
Happy tax hacking!