Your Finances
By Eric Tashlein
Most of the publicity for the Tax Cuts and Jobs Act took place after it was passed in December 2017, but the most impactful changes to the tax code take effect in 2018 for federal tax returns filed in 2019.
Most tax rates have been reduced for 2018, which will result in lower taxes for most people. The 2018 rates range from 10 percent to 37 percent.
The standard deduction was doubled but the personal exemption was eliminated, so every taxpayer should check his or her withholding status and evaluate whether it would pay to itemize or not. The tax reforms discourage itemizing, so many people will switch to taking the standard deduction. In addition, the child tax credit was doubled, certain deductions were eliminated, and caps were placed on state and local tax deductions and the mortgage interest deduction.
Most people are expected to see their tax burden ease for 2018, which means you are likely to have extra funds in your pocket in 2019. As a certified financial planner, I urge my clients not to take such things lightly. You should determine how much extra income you will enjoy and plan the best way to deploy those dollars, rather than letting the money go toward everyday expenses with no forethought. Here are some ideas for putting tax reform-generated funds to work for your future:
Pay off debt. This is always a good place to start, since debt eats away at your future. Every dollar you spend on principal and, worse, interest is a dollar you cannot use to invest in retirement planning. If you have outstanding debt, first pay off the highest-interest accounts such as credit cards, then go to work on other debts.
Reduce your mortgage. This is closely related to paying off debt, of course, but it merits extra attention. If you don’t carry consumer debt it’s a good idea to use any extra funds to boost your monthly mortgage payments in order to pay down your mortgage more quickly, because you will end up paying far less in interest over the long term. An important retirement goal is to pay off your home mortgage before you retire and live on a fixed income.
Increase savings. If you don’t have an emergency fund with three to six months’ worth of living expenses in a dedicated account, start building one. After that, maximize contributions to your IRA and 401(k) plan, and consider opening a Roth IRA, which is funded with after-tax money, if you’re eligible. The more you save today, the more financial security you will enjoy in retirement.
If you decide to use the money for a Caribbean vacation or a splurge of some other kind, I am not going to scold you: it’s important to enjoy life. The point is to make an educated decision about how to use your money within the context of a long-term financial plan.
Eric Tashlein is a Certified Financial Planner professional™ and founding principal of Connecticut Capital Management Group, LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group, LLC are not affiliated.