While April 15, 2019 looks pretty much the same as any other day on the calendar, it marks the official end of 2018 for the American taxpayer (for the most part).
In retrospect, 2018 has rolled across a very different fiscal landscape. Previous years bare only slight resemblance to 2018 on a number of fronts.
At the forefront, 2018 showcased President Trump’s Tax Cuts and Jobs Act, which became law on December 22, 2017.1
The act significantly altered the U.S. tax code: Deductions changed, tax brackets shifted, and exemptions were revamped. The act is viewed as the biggest overhaul of the tax code since the Tax Reform Act of 1986.2 American taxpayers who filed returns in early 2018 followed provisions for the 2017 tax year. Filings in 2019 will be for the 2018 tax year—under the Tax Cuts and Jobs Act.
WHAT DOES IT LOOK LIKE?
The act retains the seven federal income tax brackets as under former tax law, but lowers most taxpayers’ rates. The top rate, for example, drops from 39.6% to 37%. Income requirement levels also change in the individual tax brackets.
The new brackets are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.5 (The act also includes a 0% rate.) Here are the tax brackets and the corresponding income ranges: 3
The raising of income requirements for the tax brackets also means wage earners may fall into lower brackets.
Here’s one example. A single filer at $90,000 in taxable income would fall into the 25% bracket for tax year 2017. The filer would be in the 24% tax bracket in 2018.
Another single filer with an income of more than $426,700 (but less than $500,000) would have been in the 39.6% bracket in 2017. But the filer would be in the 35% bracket (the second highest) in 2018, a 4.6% reduction. The new income threshold for the top income bracket is more than $500,000.
These new rates are scheduled to expire in 2025 unless Congress acts to make them permanent. Exemptions also changed under the new tax code. The higher standard deductions may make it more attractive for many taxpayers compared to itemizing. Taxpayers who had itemized to take advantage of deductions for high mortgage interest, large charity donations, or local taxes may be unable to reach the standard deduction’s higher limit.
Under previous tax law, taxpayers could claim exemptions for themselves, spouses, and dependents. Exemptions lowered taxable income by $4,050 each. The act eliminates all personal and dependent exemptions. The higher deduction is intended to fill that exemption gap.
HOW TO PREPARE
While the tax structure has undergone substantial changes, you may expect to encounter few differences in the actual filing process. The filing and other deadlines haven’t changed. While the act may have changed the amount you pay in taxes or the size of your take-home check, you should begin making preparations early to avoid any unforeseen challenges.4
Get a checkup: As a starter, the IRS urges taxpayers to conduct paycheck checkups.5 The agency provides tools and resources to help you calculate the correct amount to have withdrawn from your paycheck.
The calculator will help you determine if your employer is withholding adequate amounts from your paycheck. The calculator asks for your projected gross income, your current withholding number, the current amount of federal taxes withheld, and other paycheck-related questions.
The calculator leads you through various screens that require you to enter requested numbers into boxes. The calculator looks similar to a tax-filing form.
The final figure: Once the calculator generates a number of the estimated taxes you’ll either owe or be refunded, it offers suggestions on how to change your withholding amount or request to get additional money withheld from your check.
The average IRS refund usually exceeds $2,800. If the calculator shows you’ll owe taxes at the end of the year, you may file a new Form W-4, Employee’s Withholding Allowance Certificate,6 following the advice provided by the calculator.
Advice may include changing the number of allowances you’re claiming (line 5), or requesting your employer withhold additional money (line 6). Taxpayers who receive pension income may use Form W-4P.7 Once completed, send the form to your payer if you’re making adjustments or changes.
Planning well in advance of the tax season will help better prepare you for the unexpected.
Here are several reasons to begin planning early: 8
-Your home, job, or relationships changed in 2018.
-You need to start saving money if you think you may owe taxes.
-You want to ensure you qualify for tax deductions.
You can make changes throughout the year to ensure your tax preparations go smoothly. Specifically, you can make periodic assessments of your paycheck withholdings so that you’ll get a refund or to reduce or eliminate your tax burden. You should keep track of and store your tax and other financial records to avoid delays or frantic preparations as the filing deadline approaches. Records may include W-2 forms, canceled checks, certain receipts, and previous year returns.
Discussing your unique situation with both a financial professional and a tax professional may help you make the best choices as tax season approaches. If you or anyone close to you would like to discuss how to maximize your financial situation, please give our office a call at 303-741-9772 to schedule a consultation.