The past few years have brought an immense amount of tax law changes for people across the country. The Tax Cuts and Jobs Act that was passed in 2017 intended to simplify taxes for Americans, but the shift in brackets and tax rates have created some growing pains along the way. If you got a surprising bill for your 2018 taxes or noticed a substantial change in your return this year, chances are that the tax laws have changed for your tax brackets. The first thing you should do is check your withholdings on your paycheck to make sure that you are setting enough aside each pay period. If you want to find out more about how you can set yourself up for financial success this year, contact me today.
Changes in the Tax Laws
One of the main changes in tax laws created by the Tax Cuts and Jobs Act is the way allowances are handled and the decrease in itemized deductions. Deductions can range from everything from medical expenses to mortgage interest and if you have done your own taxes, you are most likely aware of these common deductions. The weight of these deductions have changed and many of these are having less of an impact on your tax return.
In the U.S., we have a pay-as-you-go system where you set aside a portion of your paycheck every pay period and that goes to pay your taxes throughout the year. If you don’t set aside enough money throughout the year, you could be hit with an underpayment penalty and in turn, have to pay more at the end of the calendar year.
Check Your Withholdings
The IRS launched a campaign last year called the “Paycheck Checkup” in an effort to get people to look at their withholdings. If you have gone through a major life event like getting married, having a child, or gaining a dependent, you need to take the time to review your withholdings. The real issue here is making sure that you set aside enough of your wages to cover enough of your liability as a taxpayer. Traditionally, the IRS has charged you a penalty if you have not paid enough over the year to pay for at least 90% of your taxes. This year, the IRS is cutting taxpayers some slack due to the recent changes in the tax laws and is only charging people a fee if they pay less than 85% of what is owed. IRS Commissioner Chuck Rettig stated, “We heard the concerns from taxpayers and others in the tax community, and we made this adjustment in an effort to be responsive to a unique scenario this year.”
There are a few signs that you may be withholding too much or not enough according to the IRS:
- You received an abnormally large 2018 return.
- You received a large bill for your taxes.
- You have external income not covered by your standard withholdings.
- You previously itemized but opted for the higher standard deduction this year.
Taxes are a confusing topic. If you want to learn more about the new tax laws or want me to take a look at where you stand this year, contact me today.