Tax Reform: Will Your Taxes Go Up or Down?
Angela Dorsey, CFP®, MBA Torrance, CA
The Tax Cut and Jobs Act (TCJA), which was passed by Congress at the end of 2017, has certainly been a popular topic of discussion lately. Everyone wants to know if they will see a reduction in taxes, or if in fact, their taxes will go up. The short answer is: It depends!
TCJA includes many changes to the tax code, some of which may impact you positively, some negatively, according to your individual situation. Here are some tips to consider, to help you determine how the changes may impact your tax liability. Remember that these changes will affect the filing of your 2018 tax returns, which will be due in April 2019, not your 2017 taxes, to which the previous tax code still applies.
Here are some things to consider doing in 2018 to avoid a tax surprise in 2019:
Get a preview of your 2018 taxes
Ask your accountant to run a mock 2018 return after the 2017 tax returns have been finished. Take a look at the numbers: are there any potential issues that should be dealt with and planned for? Previewing your 2018 tax return can help prevent any unpleasant surprises when it comes time to file the return in 2019.
Revisit your withholdings
The new tax law means that the W-4 you filled out many years ago may need to be adjusted. The IRS came out with new withholding tables on January 11, 2018, that reflect changes such as the elimination of personal exemptions in the new tax law. However, the IRS has not yet released an updated withholding calculator or a revised W-4 form.
If you leave your W-4 as is, you could wind up withholding too little, creating an unpleasant tax surprise in 2019! Workers in higher tax brackets who receive large bonuses could see a higher tax bill next year if they don’t adjust W-4 withholdings.
Watch for State and Local Income Tax (SALT) workarounds
A big change that could affect many taxpayers is the controversial cap on state and local income tax (SALT) and real estate tax deductions. These itemized deductions, which used to be unlimited, will be capped at $10,000 for 2018 returns, for SALT and real estate taxes combined. The new law’s increase of the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly likely means fewer taxpayers will itemize; the cap on SALT and real estate tax deductions could result in residents of high tax, high-income states owing larger tax bills because of the lost deductions.
For example, California is currently attempting to structure a workaround to keep state residents from seeing a big spike in federal taxes for 2018 and thereafter. Strategies being explored include plans to replace a state income tax with an employer-side payroll tax or a system of tax credits for charitable donations made to state funds that support areas such as education and healthcare. It’s not clear yet whether these attempts will be effective, especially given that the Trump administration has pledged to fight such efforts.