Now that Tax Reform is a reality, I want to devote most of this Tax Tidbit issue to the steps each taxpayer should take to examine their own tax situations before we file your 2018 tax return early in 2019.  The vast number of changes in deductions, exemptions, standard deduction and tax rates enacted by the New Tax Reform Provisions could cause dramatic changes in refunds or balance dues for unexpecting taxpayers.  Let’s plan-ahead so that there are no surprises!

We will first look at withholding taxes under the New Tax Reform Provisions and then at the overall comparison of the New Reform Provisions vs. the old law.

• Federal Tax Withholding Tune-Up

2018 is more than half gone.  This is a good time to ask yourself, “How am I doing?”  Are you safe to presume your tax issues will be like 2017?  Of course not!  The recently enacted Tax Reform Provisions have dramatically changed how each taxpayer will calculate their taxable income in 2018 and the amount of taxes that are required to be withheld or paid through estimated payments.  There is still plenty of time left in the tax year to enact plans which will affect your overall tax situation.

Major tax reform was approved by Congress in the Tax Cuts and Jobs Act on Dec. 22, 2017.  One change directly affected the rate at which taxes are withheld from paychecks.  You should have noticed this is you are still working for an employer and receiving a paycheck.  Our federal income tax is a pay-as-you-go tax system and there are two ways to pay as you go, either through withholding or estimated tax payments.

If you are an employee, your employer may withhold income tax from your pay. Your pay includes your regular pay, bonuses, commissions, vacation pay and other amounts.  When the withholding rates change, it changes the amounts that are paid to the IRS on your behalf.  To ensure that enough withholding is paid and to avoid owing a balance due and possible penalties, it is recommended that everyone do a “Federal Tax Withholding Tune-up” now.

I recommend that taxpayers check the amount withheld each year; particularly when the rates you pay change or your family situation changes. It’s especially important for taxpayers with more complicated financial situations to verify they are withheld as the law also changed the standard deduction, removed personal exemptions, increased the child tax credit, limited or discontinued certain deductions and changed the tax rates and brackets. Married taxpayers who both work, taxpayers who work multiple jobs and taxpayer who work part of the year are some of the groups that are particularly subject to tax withholding amounts (from the IRS Tax Withholding Charts) which may not properly reflect the tax necessary to be withheld.

You can use the IRS Withholding Calculator on IRS.gov  This tool is designed to help you determine the right amount of tax to be withheld from your paycheck.

The amount of income tax your employer withholds from your regular pay depends on two things:  the amount you earn, and the information you give your employer on Form W-4, Employee’s Withholding Allowance Certificate.

If your employer isn’t withholding the proper amount to cover your taxes under the new rates provided to them by the IRS, you may need to complete a new Form W-4 to change the amount withheld.  If you need help, call me.

Tax may also be withheld from certain other income – including pensions, social security payments, bonuses, commissions, and gambling winnings.  In these cases, the amount withheld is usually calculated at a set percentage of the payment and is paid to the IRS in your name.  These withholding amounts should also be reviewed for changes brought about by the recent tax reform provisions.

The previous review of your wage tax withholding gives you part of your overall picture.  The following four examples of how taxpayer’s overall tax will compare under the New Tax Reform Provisions vs prior law will give you another piece.  How do your new withholding taxes compare to taxes withheld last year?  Will that increase/decrease be offset by the following tax situations (if similar to your own) illustrated below?

 Example 1:

Two Wage Earner Family of Four:  Saves $3,559 In Federal Tax

Facts:   – Family of four (married couple with two children under 17)

                                    – Homeowners

                                    – Combined wages of $150,000

                                    – Itemized deductions totaling $22,000 ($7,000 state/local tax; $4,000 real property tax; $1,000 personal property tax; $8,000 mortgage interest; $2,000 charitable contributions).

                        What would change under the Tax Reform Provisions:

– Itemized vs. standard deduction.  Under prior law, the family’s itemized deductions totaled $22,000.  Under the new Tax Provisions, the expanded standard deduction of $24,000 is more advantageous for the family.  The deduction for state and local income tax (or sales tax if taxpayers chooses), real estate tax and personal property tax is capped at $10,000 – reducing the family’s allowable itemized deductions to $20,000.   However, the reduction of these deductions is more than offset by the higher standard deduction.

– Tax rate.  The family is in the 22 percent tax bracket, compared to the 25 percent tax bracket under prior law.

– Tax credits.  Under prior law, this family would not receive a Child Tax Credit (CTC) due to income phaseouts.  This family is eligible for a CTC of $4,000.

– Exemptions.  While personal exemptions are eliminated, a combination of the increased standard deduction, increased CTC and lower rates make up for the loss of $16,600 in exemptions.

Results: Even with the removal of exemptions, this family would save $3,559 compared with prior law.  The savings are due to an increased standard deduction, lower tax bracket, and a more generous CTC. 

  Example 2:

Lower-Income Head of Household With Two Children:  Saves $1,802

Facts:   – Family of three (single parent with two children under 17)

                                    – Renters

                                    – Wages of $45,000

                                    – Used standard deduction of $9,550 under prior law

                        What would change under the Tax Reform Provisions:

                                    – Standard deduction.  Because this family uses the standard deduction, the higher standard deduction of $18,000 is $8,450 more favorable.

                                    – Tax rate.  The family is in the 12 percent tax bracket, compared to the 15 percent tax bracket under prior law.

                                    – Tax credits.  The Child Tax Credit (CTC) is expanded and increases from $1,000 to $2,000 per qualifying child.  With 2 qualifying children, this taxpayer receives a CTC of $4,000    versus $2,000 credit under prior law.

                                    – Exemptions.  While personal exemptions are eliminated, a combination of the increased standard deduction, increased CTC and lower rates make up for the loss of $12,450 worth                            of exemptions.

                        Results:  Even with the loss of $12,450 worth of exemptions, this family would save $1,802 compared with prior law because of the increased standard deduction, lower tax rates, and the increased CTC.

 Example 3:

Middle-Income Single Filer:  Saves $101

Facts:   – Single filer

                                    – Homeowner

                                    – Wages of $120,000

                                    – Itemized deductions totaling $22,500 ($10,000 state/local tax; $5,000 real property tax; $6,000 mortgage interest; $1,500 charitable contributions)

                        What would change under the Tax Reform Provisions:

– Itemized vs. standard deduction.  The deduction for aggregate state and local income tax and property tax would be capped at $10,000.  This taxpayer’s combined real estate tax, and state and local income tax if $5,000 over the $10,000 maximum.  However, the total of the $10,000 allowable state and local tax deductions, mortgage interest deductions, and charitable contributions exceed the expanded standard deduction of $12,000 for a single filer.  Therefore, itemizing is still more advantageous by $5,500.

– Tax rate.  This filer is in the 24 percent tax bracket compared to the 28 percent tax bracket under prior law.

– Exemptions.  This taxpayer’s $4,150 personal exemption is eliminated.

                        Results:  This single filer would have a $101 decrease in taxes.  The rate reductions make up for the loss of $5,000 in itemized deductions ($22,500 – $17,500) and the loss of the personal