How to Plan for Tax Reform
As we approach the end of 2018 and the first year of the Tax Cuts and Jobs Act (TCJA), the window for 2018 tax reform planning is still open but closing quickly. You may be wondering, “how can I prepare for tax reform now?” Ideally, taxpayers who receive most of their income from salaries and wages should have already checked their withholding compared to their expected tax liability under tax reform.
Yet, undoubtedly many have not taken the time to do this in order to prepare for tax reform changes. Why worry about withholding when tax rates are lower and tax bills will be cut? For one thing, it’s easy to confuse one’s tax liability with their refund. Your tax bill can be reduced, but lower withholding due to the change in the IRS withholding tables could mean your refund has been parceled out each time you get paid. In fact, you could end up owing the IRS even though your tax bill is lower than last year’s, all because your withholding was reduced.
Preparing for Tax Reform – Look Beyond Withholding to Your Life Changes
When it comes to planning for tax reform, another reason to compare your withholding to projected tax liability now is to avoid a potential shock when you file your tax return in 2019. Even without tax reform, events during the year that affect you personally could also affect your tax bill – getting married or divorced, buying or selling a home, starting college, retiring, having a child, etc. These, and many more events, impact your tax liability – some favorably, some not. It just depends on the situation. That’s a good reason to review your year from a tax perspective and prepare for the impact of tax reform. If you’re not comfortable doing that on your own, you can always get help from our Tax Pros.
There are only a few days left in 2018, so adjusting withholding now will not significantly impact the 2018 tax year. However, simply knowing where you stand can never hurt to help you prepare for tax reform. If you find yourself significantly underwithheld, you may decide to make a one-time payment to the IRS (go to https://www.irs.gov/payments to view your options for making a payment). Many taxpayers who pay their taxes through withholding are not aware that they can also make payments directly to the IRS at any time, outside of payroll withholding. This is a great way to plan for tax reform before filing taxes. The fastest and cheapest way is to use the EFTPS (Electronic Federal Tax Payment System), although you will have to enroll first.
Tax Reform Planning for Homeowners
Depending on your situation, your income and withholding is only part of your tax reform planning opportunity. Consider the other changes under the TCJA, and how they affect you personally. Do you own a home and pay mortgage interest and real estate taxes? You may not be able to deduct them this year if your total itemized deductions are less than the new higher standard deduction for your filing status. However, that’s not necessarily a bad thing.
For example, suppose you’re married and you own a home. You pay $6,000 in mortgage interest and $3,000 in real estate and property taxes, and all your other itemized deductions total $10,000. You will not be able to itemize and “write off” the $19,000 because your 2018 standard deduction is $24,000. Maybe last year you made an additional payment on your mortgage, so you could deduct more interest.
By spending a bit of extra time to prepare for tax reform this year, you will know that an extra payment will not affect your tax bill in 2018, and you can earmark that money for other purchases. Planning for tax reform now and in the future will allow you to make smarter financial decisions and reduce tax-time surprises.
Need Help Planning for Tax Reform?
If you’ve got questions about tax reform and how it might affect your return this year, we can help. Rely on our knowledgeable Tax Pros to help you understand what tax reform means to you. Visit one of our H&R Block offices to make an appointment.
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