Headlines indicate that the Tax Cuts and Jobs Act (TCJA), effective in 2018, is a tax reduction for the middle class. While that may be so for some, it is not so for many. We’ve noticed two disturbing trends we’d like to address.
Wage earners have recently noticed an increase in their take home pay resulting from an adjustment to withholdings tables. Employers are required to follow these tables, unless instructed otherwise by the employee. This adjustment simply reduces the amount of income tax paid to the government for 2018 taxes on your behalf. Many taxpayers believe this is due to a tax reduction, but often it is not. For tax returns we’re preparing for clients now, we project 2018 tax results and we’re learning that many of our clients will pay more taxes in 2018 under TCJA.
This is principally the result of two factors, among others. First, while the standard deduction is now higher at $12,000 for a single taxpayer and $24,000 if married, state taxes paid are limited to $10,000 as itemized deductions beginning in 2018. That includes the combination of state income taxes and property taxes. Most homeowners in our area pay significantly more than $10,000 in combined income and property taxes and many have more than the new standard deduction in itemized deductions.
Secondly, the TCJA eliminated the personal exemption amount, $4,050 per dependent in 2017. For a family of 4, this is a loss of $16,200 in the reduction of taxable income. Combined, we’re seeing that deductions which were frequently in excess of $35,000 will be limited to $24,000 in 2018.
What can you do? Look at your 2017 income tax return and project changes that might occur in your personal financial situation for 2018. Then, compute your taxes using the new rates under TCJA. You can find details on rates and other tax changes under “Newsletters”, “Tax Alerts” at www. morriscpas.com (http://www.cmcocpas.com/content/pdf/tax_brief/us/2017_December_Congress-Approves-Overhaul.pdf). Finally, if you need to change your withholdings taxes for any reason (up or down) submit a revised W-4 form to your employer and add a dollar amount to be withheld from each pay check, if necessary.
We hope you find this helpful but please note that the information contained in this blog, including comments posted by visitors, is provided for informational purposes only and cannot be relied upon for any financial decisions. It should not be construed as, nor is it intended to be, a substitute for obtaining accounting, tax, or other financial advice from an appropriate professional. The reader is directed to consult with their own adviser for guidance on anything contained herein.