-We are over half way through 2018. If you are a W-2 employee-Review your tax withholding now on your paycheck to make sure you won't owe when filing your 2018 tax return.
-The law has changed. Last year’s tax planning is obsolete. It is time to reassess your taxes.
Due to the Tax Cuts and Jobs Act, it is imperative that you reevaluate your tax planning. There is still time to adjust your planning to make sure you are getting the best tax benefit.
Your withholding
Under the new law the IRS overhauled the tax withholding tables, which employers use to determine how much income tax to withhold from your paycheck based on the number of allowances you claim and how much you earn.
Have you had a chance to review your withholding since the new tables came out in February? If not do so now.
If you are withholding too much, you will get a refund next April. But if you are not withholding enough, you’ll owe the IRS.
In previous years, it may have made sense for you to withhold less than the tax tables show under certain circumstances. For instance, if you itemized deductions. That could no longer be the case, especially now that the standard deduction has roughly doubled to $12,000 for singles and $24,000 for married-filing-jointly.
It is also important for you to take a look at how much you are having withheld if you have multiple jobs. If you are not having enough withheld, you may get a surprise come tax time. Employers do not know how much you are making at other jobs and are withholding based on the information that you have provided them.
For example: John, who is single, works from January 2018 through December 2018 and makes $10,000 at his daytime job. Additionally, from July 2018 to December 2018, he works at a separate company making deliveries in the evenings making an additional $9,000. Since the two companies payroll departments do not know how much he earns at the other job they are only withholding based on how much he has earned with them.
Each would see less than the $12,000 threshold and withhold $0. However, John would have (19,000-12000) $7,000 in taxable income.
IRS’s withholding calculator helps taxpayers deal with these situations.
Itemized deductions
The new tax code increased the standard deduction but removed many itemized deductions. Those changes include a $10,000 cap on the amount of state and local taxes that can be claimed, and the elimination of miscellaneous itemized deductions, such as unreimbursed employee expenses and investment fees. It also made some home equity loan interest non-deductible. All of these changes mean that more people will be using the standard deduction. While some may benefit, others will hurt. Especially those that paid a lot in state taxes and that had a lot of unreimbursed job expenses.
Exemptions Gone
The new tax code did away with the deduction for each person claimed on the tax return. In prior years, there has been a deduction for each dependent claimed on the return that was adjusted based on inflation. In 2017, the amount was a $4,050 deduction for each person claimed on the tax return. This means a family of four would have a deduction of $16,200. Starting in 2018 this deduction no longer exist.
Child Tax Credit
One very helpful thing under the new tax act is the increased child tax credit that will be available to more taxpayers to claim. The credit has increased from $1,000 to $2,000 per qualifying child under the age of 17. Also, the AGI threshold that the credit starts being reduced was raised from $110,000 for married couples to $400,000. For dependents over the age of 17, the new tax code does include a nonrefundable $500 credit. This can include an aging parent or children over 17.
How to be prepared for the changes
As you can see from this article, tax returns will be greatly affected by some different factors in 2018. While your standard deduction may be higher, you will lose the dependent exemption deduction. The child tax credit will benefit those who qualify which is another factor to consider. Also, the tax rates and brackets have all changed. Some people will owe less tax, while others may owe more.
I highly recommend that you sit down with a CPA to go over your prior year tax returns and to see how you will be impacted in 2018 and beyond. We love to provide tax planning services to our clients so that we can make sure there are no surprises nor any unnecessary penalties. We work hard to keep up with all the changes so that we can make our clients as prepared as possible!
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