2018 Tax Confusion Spotlights the Need for Personal Planning

tax year 2018 confusion

Many Americans cheered the passage of the Tax Cuts and Jobs Act, a $1.5 trillion tax code overhaul that was signed into law in December of 2017. Proponents of the legislation said the benefits would be lower tax rates for both individuals and corporations. Not only that, it would bring a long-desired simplification of the complex U.S. tax code.

But as people begin to file their 2018 taxes, then await their customary tax refunds, some taxpayers are finding surprises. Their refunds are lower than they expected, some deductions have disappeared, and in some cases, they have actually owed money to the IRS.

How Did We Get Here?

So, how does all of this affect people's tax bills?

It helps to consider the highlights of the Tax Cuts and Jobs Act. To begin with, five of the seven federal income tax rate rates were lowered, with the top tax bracket decreasing from 39.6% to 37%.

Second, the standard federal deduction increased to $12,000 for an individual, or married person filing separately. As for other filers, it rose to $18,000 for heads of households and $24,000 for joint filers. This is the set amount taxpayers can automatically deduct from their adjusted gross income for tax purposes when they choose not to itemize their deductions.

If your standard deduction is larger than all of your allowable itemized deductions combined, then you take the standard deduction.

Third – and this is the cause of some taxpayer heartburn – popular deductions were reduced or eliminated. Gone are deductions for home equity loan interest, expenses occurred for moving (even relocation expenses for a new job), and some job costs, such as licensing and regulatory fees.

SALT in a Wound?

One of the costliest consequences of the new tax rules is the cap on state and local taxes, known as SALT cap. Beginning with the 2018 tax year, taxpayers are limited to a $10,000 cap on deductions that include state income taxes, personal property taxes, and real estate taxes.

This could result in a significant loss to property owners with high-value homes in states with the highest property tax rates, such as New Jersey, Illinois, New Hampshire and Connecticut. It could also be a financial blow to homeowners in states with the highest real estate prices, including New York, Rhode Island, Vermont and California.

These taxes will still be deductible on most state returns, but their loss as a federal deduction has affected many taxpayers.

The Simple Fix Many Taxpayers Missed

On January 11, 2018, the Internal Revenue Service released Notice 1036, updating income-tax withholding tables for 2018 to reflected changes made by the tax reform law.

According to an IRS statement released then, “New withholding tables are needed for 2018 to reflect the changes in tax rates and tax brackets, the increased standard deduction and the repeal of personal exemptions, among other things.”

The guidelines were issued to employers so they could make changes to their payroll systems. “The new withholding tables are designed to work with existing W-4s that employees have on file with their employers,” the IRS announced.

What seems to have caught many taxpayers off-guard is their failure to revise those W-4 withholdings in light of the new tax changes coming their way. In its early press material, the IRS encouraged Americans to “perform a ‘paycheck checkup’ to see if you have the right amount of tax withheld for your personal situation.”

The IRS even produced a consumer video to explain the need for a paycheck checkup.

But recent national news reports featuring frustrated taxpayers suggest not enough Americans either received the message or took the time to measure its impact.

IRS Releases Early Stats on Returns and Refunds

The Treasury Department took to Twitter to offer clarity.

It posted on Feb. 11, 2019 that initial news reports might not have been capturing the entire picture:

The IRS also reported that the average refund amount through Feb. 1 of this year was $1,865. That amount is a 8.4 percent drop compared to the same period last year.

It appears that the tax year 2018 will be one of adjustment for taxpayers in every tax bracket. The good news amidst all the chaos? On the whole, taxpayers are expected to see some income gains.

According to the nonpartisan Tax Policy Center, a Washington think tank and a project of the Brookings Institution, 7 out of 10 Americans will see an overall tax cut.

What Can Be Done to Solve This Challenge?

Taxpayers should be mindful that they will likely see smaller returns. Or they may actually have to submit a payment for a tax bill, perhaps for the first time in years. Checking your personal level of withholding for future tax years is one way to avoid another unpleasant tax surprise.

Another strategy is working with an experienced tax professional, a knowledgeable financial professional, and other specialists for your personal situation. With their help, you may want to explore deduction opportunities that are still at your disposal.

For retirees, one tax planning strategy growing in popularity is qualified charitable deductions (QCD).

A QCD is a direct transfer of money from an IRA to a qualified charity. The money goes from your IRA custodian to the charitable organization.

Apart from benefiting your cause of choice, a QCD is a way for retirees to satisfy RMD requirements. It can also help reduce your tax burden on Social Security benefits, as well as potentially other sources of retirement income.

Getting Your Tax Strategy in Order

For retired and mature working Americans, taxes is just one of many financial parts for which to plan. Are you ready to explore the tax efficiency of your current plan and see how you might enjoy more financial security in the future? Help is a click away.

Financial professionals at stand ready to assist you. Use our "Find a Financial Professional" section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

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