Across the country, many people went into this year’s tax season with one big question in mind: How will the new tax law affect me? It was a tax season for the history books, as the Tax Cuts and Jobs Act (TCJA), which passed in December 2017, made fundamental changes to the U.S. tax code, and 2018 returns were the first time most taxpayers could see the practical impact of these changes. In fact, in an April 2019 Gallup poll, 43% of Americans said they were unsure how the new tax law affected them personally.
Here at JNBA, we worked closely with our clients and their tax professionals to help navigate the new law and the new questions it sparked. Now that tax season is behind us, it’s the perfect time to take a step back, assess where the chips fell, and determine if there’s anything you may want to change now to alter how your filings and returns look in 2019.
Check your withholdings
One important aspect to keep in mind: withholdings. After all, the amount of your refund or the amount you owe with your return actually has little to do with your overall tax burden. Rather, these numbers reflect whether your withholding and/or estimated tax payments during the year were more or less than your final tax bill.
In theory, your withholding should equal your tax liability; otherwise you are loaning your money interest-free to the government. But IRS formulas tend to err on the high side, partly because people usually dislike owing a balance and are often happy to receive a tax refund.
Employers estimate your federal tax bill based on the number of exemptions claimed on your W-4 Form and on IRS calculation tables. The IRS did release 2018 calculation tables reflecting the new rates and rules. However, the agency did not replace the W-4 Form and worksheet, which are based on exemptions, deductions, and credits that were reduced or eliminated under the new tax law.
This resulted in smaller refunds or higher tax bills than expected for some taxpayers, especially dual-income households with more complicated situations. The Treasury estimated that 21% of taxpayers would be subject to underwithholding because of the TCJA, compared with 18% if the tax law provisions had not changed.
If you owed a large amount of money for 2018, bumping up your withholding now could help avoid a similar fate next April. You might also reevaluate your withholding if you received a large refund; you may put it to better use throughout the year if you can take home more of your pay. It’s also a good idea to review your withholding whenever something changes in your life — such as a marriage, divorce, birth of a child, new job, or other significant change in your financial situation.
The IRS (irs.gov) has an up-to-date, online calculator that can help you determine the appropriate amount of withholding. Remember that you still need to complete and submit a current W-4 to your employer to make any adjustments. An all-new W-4 Form for the 2020 tax year is in the works but isn’t expected to be available to employers until later in 2019.
Assess the impact
How you fared under the TCJA depends on a variety of factors, such as how much you earned, your filing status, the ages of your dependents, and where you live. Undertaking a thorough side-by side comparison of your 2017 and 2018 returns could help you identify changes that affected your bottom line. Be sure to note differences in your allowed deductions, taxable income, and total tax liability.
Standard deduction amounts for 2018 roughly doubled to $12,000 for single filers and $24,000 for married taxpayers filing jointly. However, personal exemptions ($4,050 in 2017) for yourself, your spouse, and your dependents are no longer available. The expanded child tax credit may offset the loss of exemptions for some taxpayers, but the math may not work out in your favor if you’re a family of four or more.
A number of tax deductions commonly used by high earners have also been modified, capped, or eliminated. For example, the itemized deduction for state and local taxes (SALT) is now limited to $10,000 ($5,000 if married filing separately). This provision caused tax increases for some taxpayers in high-tax states. On the other hand, the overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) was repealed, and fewer taxpayers are subject to the alternative minimum tax.
If you have questions about the new tax law, your withholdings, and potential strategies to reduce your tax liability for 2019, consider seeking advice from a tax professional or advisor.
JNBA is not an accountant and no portion of the above should be construed as accounting advice. All accounting issues should be addressed with an accounting professional of your choosing.
Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, Inc.
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