Think you are getting a big refund in April when you file the first tax return under the changes in the Tax Cuts & Jobs Act?
You better do the math now so you are not surprised by a bill because beyond the much-heralded tax cuts, the new law entails complications that may change your situation in ways you did not expect.
The Tax Policy Center estimates that 80 percent of taxpayers will receive a tax cut averaging $2,100, while 5 percent face an increase averaging $2,800. But there are a few caveats to that.
Among those who need to be careful: people in high-tax states or those who have changed jobs, retired or hit age 70½, started or sold a business, have a large family or faced changes such as an older child leaving home or finishing college.
Here is what you need to check now:
1. Fix your paycheck
Start with the IRS withholding calculator, to make sure the right amount of tax has come out of your check so far this year. The Government Accountability Office has estimated that about 21 percent of taxpayers have not been withholding enough from their pay during the year to cover taxes they will owe. That means even though your tax bill could be lower than last year’s, you might still owe when you file your return if you have not had the right amount taken out all along.
Even an up-to-date W-4 may be claiming too many allowances now that deductions and exemptions for family members have been eliminated, said Jackie Perlman, tax analyst for The Tax Institute of H&R Block, especially if you filed a W-4 years ago at your workplace and never updated it.
“If you are used to getting a large refund, and anticipate it will go into fixing your van or paying for college, the results could be a blow,” said Cari Weston, director of tax practices and ethics for the American Institute of Certified Public Accountants.
You may also face a penalty if you paid too little throughout the year.
There is still time to fix it. File a new W-4 at your workplace, perhaps with no allowances, so you pay a large chunk of taxes during the rest of the year. If you think you paid too much, do the reverse.
2. Add up your deductions
This year, the standard deduction has almost doubled to $24,000 for couples and $12,000 for singles. Families will also benefit from larger child credits of $2,000 per child. But deductions for state and local taxes can total only $10,000, which may be far lower than what they previously deducted for income, property and other taxes in high tax states such as New York or California.
Robert Keebler, a CPA with Keebler & Associates in Green Bay, Wisconsin who trains others, suggested a new strategy: Itemize every other year. The idea is to simply take the standard deduction in one year and the next year bunch together as many deductions as possible so they far exceed the standard deduction.
For example, maybe in the past you gave to charity each year and deducted the contributions, but this year, if you take the standard deduction the charitable contributions will not help cut your taxes. So you could skip giving to charity in 2018 and make a double contributions in 2019.
You could also wait until January 2019 to pay any state or local tax bills that arrive this December. When those bills come around again in December 2019, pay them quickly that year to amass another big tax deduction. You might also cluster medical expenses like dental or vision into 2019, and time your mortgage interest payments also.
3. Max your retirement
The easiest way to make a substantial reduction in your taxes continues to be to reduce your income by filling up 401(k)s at work to the maximum or to fund traditional IRAs if you qualify. That will not only help lower your tax bill, but contributing to your retirement fund or health savings account will benefit you for years into the future.
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