Like many taxpayers, if you’ve already filed your federal income taxes for 2018, you may be surprised to discover you’re not getting a refund this time. If so, this was almost certainly due to the sweeping tax overhaul made by the 2017 Tax Cut and Jobs Act (TCJA).
Since personal tax rates were lowered by the TCJA, it’s natural to assume you would owe less taxes, not more. For some, this may not be the case. For others, the timing of your tax payments may have been different and surprising this year.
Seeing that the TCJA was promised to offer most people a tax break, understanding why you might owe more this April (rather than less) can be confusing. The following questions and answers are designed to shed some light on this situation, so you can start revising your tax strategies for coming years.
Q: What changed?
A: In addition to lowering personal income tax rates, the TCJA doubled the standard exemption to $12,000, added limits to deductions for state and local taxes (SALT), eliminated personal exemptions, set limits on deductions for home-mortgage interest, among many other changes. Given all of the changes, you may find that you’re no longer withholding the proper amount of taxes from your paycheck and/or quarterly installments to the IRS. When filing, this can result in either overpaying your taxes (and getting a refund) or underpaying (and owing money).
Q: What does this mean for me? A: In light of these new changes, you should carefully review your withholding and make adjustments if necessary. To help with this, the IRS published new withholding tables and updated its withholding calculator into which you can input your current tax data to see if you need to make any changes.
Q: How do I change my withholding? A: If you work as an employee, you change your withholding by making adjustments to your W-4. If you work for yourself, you either increase or decrease your estimated quarterly payments. A W-4 determines how much income tax is withheld from your pay by your employer. You fill out a W-4 when you start a new job, but you can change it at any time. Specifically, the form asks you for the number of allowances you want to claim based on personal factors, such as being married and/or having children and filing as head of household.
The more allowances you claim, the less federal income tax your employer will withhold, which translates to more money in your paycheck. The fewer allowances you claim, the more federal income tax your employer will withhold, lowering your take-home pay.
It’s important that you withhold the proper amount from your paycheck or make quarterly payments. Don’t withhold enough, and you’ll owe the IRS at the end of the year. Withhold too much, and you might get a big refund, but you’ve basically given the government an interest-free loan for that year. Maximize your tax savings Adjusting your withholding is just one of many strategies you can use to save on your taxes. Indeed, the TCJA also changed tax laws that have the potential to affect your estate planning strategies as well. Contact us to learn more.