The 2018 filing season has come to a close, and there were many changes that affected the 2018 tax liability of every taxpayer. The reason is the largest tax overhaul seen since 1986, the Tax Cuts and Jobs Act of 2017.
What was the most common phrase heard by CPA’s across the country? It was, “But, I always get a refund!” As with anything, the details of your personal tax situation can greatly impact your filing outcome. It is important to consider and discuss tax consulting and planning strategies that are unique to you with your tax professional. If you experienced a similar reaction, let us review two of the items that may have resulted in a change in refund status this year.
Federal Tax Withholding from Wages
Your W-2 federal tax withholdings were simply not enough to cover your tax liability. Your withholdings are an amount that is taken out of your paycheck every time you are paid, and is likely ignored. Not until you must write a check to the IRS do you realize you did not have nearly enough tax withheld during the year.
“I did not change my withholdings in 2018, why would this even matter?” This is a valid question. The IRS released updated federal withholding tables on January 11, 2018 to coincide with the new tax law. You may have noticed an increase in your “take home pay” after this release. This increase in pay came from a reduction in federal tax withholding.
Furthermore, supplemental wages, such as bonuses, are subject to a flat 22% federal withholding. This may cause you to be under-withheld as well. For example, if you are in the highest tax bracket of 37%, you are already short by 15% if you do not ask your employer to withhold additional federal taxes.
The IRS provides a withholding calculator for taxpayers to use here. Consider using this tool to check your withholdings and update Form W-4 with your employer if adjustments need to be made.
State and Local Tax Limitation of $10,000
The state and local tax (SALT) limitation of $10,000 was a large limitation for many taxpayers this year. In the past, if you paid state income and property taxes during the year, you were allowed a federal itemized deduction for these amounts, no matter how much. Most taxpayers qualified to use itemized deductions because of this deduction alone.
Now that this deduction is limited to $10,000, what you were able to deduct in 2017 could have been drastically reduced in 2018. For example, a single taxpayer who has $25,000 of state income and property taxes paid could only deduct $10,000, leaving $15,000 as a non-deductible expense. In 2017, you were able to itemize and take a $25,000 deduction since you were over the standard deduction of $6,350. Now, in 2018, you only have $10,000 of itemized deductions and will therefore take the new, and increased, standard deduction of $12,000. You have now lost $13,000 of deductions through the limit on SALT deduction and the new higher standard deduction.
As you increase the amount of state and local tax you paid, this could have a big impact on your current year tax liability compared to prior years, even though the tax rates are lower in 2018.
Remember, just because you owed tax on April 15th does not mean you paid more tax than you did the prior year. Your total tax liability could have been lower than the prior year, but due to different circumstances, such as lowered federal tax withholding, you had to pay more at the end of the year.
For tax planning and concerns regarding your tax withholdings or estimated tax payments, please contact DMJ and speak with a tax professional.