How did the new tax changes work out for you? Did you wind up owing more than you expected? Or were you one of the many small business owners who benefited?
We promised to share changes from the Tax Cut and Jobs Act (TCJA) with our readers after taxes were filed for tax year 2018. Because this was a year of major changes to tax rates and laws, there were some unexpected consequences. We share the biggest issue below, and steps you can take to make sure you are on track with your taxes moving forward, thanks to two of our trusted resources in tax, Jen Glaser, CPA, of Lavine, Lofgren, Morris & Engelberg, LLP, and Anne Burns, CPA, of Stremlau Burns CPAs LLP.
Overwhelmingly, the biggest issue for clients in the 2018 tax year was under withholding for taxes. As Anne shared, in February 2018 people started receiving more take-home pay. Many didn’t even notice, because the change wasn’t significant enough. In quite a few cases, client’s federal tax liability went down as a result of the revised tax schedule, but their federal withholding went down even more. In the end, many wound up either needing to pay tax, or received a much smaller refund than expected.
The challenge here, according to Anne, was that people’s withholding changed without any action on their part. Many didn’t realize the change was made for them without their input.
Jen shared that under withholding was a huge issue with many of their clients, as well. She suggests you check in with your Certified Public Accountant mid year any time there are major changes to tax rates and laws. They can let you know if you are withholding enough, and if not, there is still time in the tax year to change withholding so that you don’t wind up with a big tax hit.
Unfortunately, we also had several clients who wound up paying a big tax bill they did not anticipate as a result of this change to withholding. Not only was a big check written, but in some cases clients were hit with penalties. We want to make sure the proper amount is being withheld moving forward so that clients are not surprised again at the 11th hour with owing taxes, so we asked Anne and Jen for different steps taxpayers can take to make sure they are withholding the correct amount.
Steps you can take to make sure your withholding is on track
1. Check in with your CPA at least mid-year (which is right about now..)
2. Check where you are with one of the online withholding calculators:
a. https://www.paycheckmanager.com/FreeCal/free_payroll_calculator.aspx
b. https://www.irs.gov/individuals/irs-withholding-calculator
3. Do some quick calculations yourself to see where you are. Look at your pay stubs at least quarterly to see what percentage of taxes are being taken out based on your income. If you aren’t a numbers person, question why you are getting more money from each paycheck than you were previously. You can also see where you are by taking your total tax and dividing it by your taxable income. Then, compare that number to your effective tax rate.
It wasn’t all doom and gloom with respect to taxes, though. Jen noticed that many more clients were no longer itemizing for federal taxes. Anne saw many clients benefit from the lower federal tax liability. And both Jen and Anne saw many self-employed clients benefit from the new 20% Qualified Business Income (QBI)deduction.
How did you fare with the 2018 tax law changes? If you wound up owing when you expected a refund, or didn’t get the refund you expected due to withholding changes, we’d recommend you reach out to your CPA, or contact us and we’d be happy to introduce you to the CPAs we collaborate with, like Anne and Jen.
