Tax year 2018 is set to be one the likes of which we’ve never seen before, due to the tax reform act passed last December (Tax Cuts and Jobs Act, or TCJA). No doubt you’ve heard all the talk of certain itemized and standard deductions going away, lower income tax rates, lower corporate rates, additional qualified business income deductions and a higher standard deduction floor.
One adjustment that people may not be aware of, but that probably affects almost everyone reading this, is the change in withholding. You may have noticed back in February that your net paycheck changed a bit. This is because you have a new, lower federal tax rate and Congress wanted everyone to take home a little more money with every check, rather than waiting for you to file your returns in 2019 and get it all at one time. Sounds great, right?
Unfortunately, after talking with some of my clients what I am discovering is that there may be cases where your additional take-home after the withholding adjustment exceeds the reduction in your tax rate. The result is that you’ll end up owing taxes next April – an experience nobody enjoys!
As we are now in July, halfway through 2018, I encourage everyone to perform a mid-year review in order to assess your tax situation for this year. Taking stock now will allow you to save additional money, adjust your withholding, or (in the best case) get ready for a larger refund. Evaluating your position now is the best way to avoid surprises at filing time, whether good or bad. Remember, surprises are for birthdays, not April 15th.
One of the best ways to do this is through the IRS’s online withholding calculator. When you visit the site you can plug in your numbers, see where you are in terms of taxes and then make any appropriate adjustments. Of course, you can also use my favorite type of planning: advice from an actual CPA. Call your tax advisor to get the most accurate assessment of your tax picture. We’re always glad to help.