ALERT: Check your withholding now to avoid surprises in April.
Tax Cuts and Jobs Act May Have Negative Impact
While most experts estimate that approximately two-thirds of U.S. taxpayers will see a decrease in their income tax liability due to the Tax Cuts and Jobs Act of 2017 (“the Act”), up to 7% of taxpayers are expected to see an increase in their income taxes as early as 2018. Taxpayers most at risk for an increase include those who:
- Earn high incomes – including dual income families
- Live in high tax states
- Have typically itemized deductions
Several changes incorporated in the Act are likely to have a particular impact on these taxpayers:
- Deductibility of state & local taxes – whether income or property taxes – is capped at $10,000 for both individuals and married couples
- Personal exemptions are eliminated
- Many miscellaneous deductions have been curtailed or eliminated altogether
- Mortgage interest deductions have been reduced for new mortgages and interest on home equity loans is no longer deductible.
Withholding Tables May Work Against You
Shortly after the Act was signed into law, the IRS updated withholding tables to reflect two changes that are likely to be positive for many taxpayers:
- Increase in the standard deduction (it nearly doubled for both individuals and couples filing jointly)
- Adjustments to the child tax credit, including a doubling of the credit and a significant increase in the phase-out limitations
The adjustments reduced the value of each withholding allowance, so most taxpayers would likely see a decrease in overall withholding. However, this does not take into account the nuances that affect many high income taxpayers. So, while you may be paying less in taxes through payroll withholding, your ultimate tax bill in April 2019 could be the same as usual – or even higher – resulting in money owed to the IRS.
The Bottom Line
With 4 months remaining in the 2018 tax year, there is still time to evaluate your overall tax situation – including your withholding – and make adjustments in order to avoid a significant tax bill in April. Additionally, while new restrictions on itemized deductions may limit your options, there is still some flexibility, particularly with regard to charitable contributions.
Contact your AKM CPA to review your circumstances and plan ahead.