Tax Laws Changed Last Year – Did Your Tax Strategies Change Too (Including Withholdings)?
It’s been more than a year since the Tax Cuts and Jobs Act (TCJA) went into effect. It lowered tax brackets; eliminated exemptions; increased the child tax credit; and for most of us, eliminated our ability to claim itemized deductions such as income and real estate tax, mortgage interest, charitable contributions, etc.
In response to the overhaul, most of us should also have revisited our tax-saving strategies – although I’ll bet many of you have not. Old habits die hard.
Over the next few articles, I’ll cover a few ways to recharge your tax planning under the new TCJA rules. First, let’s revisit an important recommendation I made in 2018:
If you are employed, be sure you are having enough withheld from your paycheck to cover this year’s tax bill.
This is important because, although tax rates declined, withholding rates dropped even further. The bump on your paycheck may have felt like a pay raise at the time, but you were basically borrowing from income taxes still owed. As a result, many taxpayers got a nasty surprise when they filed their 2018 Form 1040, and didn’t get the refund they were expecting. Or, worse, owed more.
If this happened to you last year, don’t let it happen again. If you haven’t already increased your withholding in response, please do it now. Increase withholding from your remaining 2019 paychecks to properly cover this year’s taxes owed. Then revisit your withholding again in 2020. The IRS has a Tax Withholding Estimator to help: https://www.irs.gov/individuals/tax-withholding-estimator
It’s even more important to get this right in 2019 and beyond. Last year, in a very unlike-IRS act, the government took pity on you if you accidentally shorted your 2018 tax payments. For 2018 only, they adjusted the underpayment penalty formula, requiring only 80% of your income tax to be paid before April 15th. This year, it’s back to the normal 90%. It’s unlikely they’ll forgive you twice.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ who founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, which fits right in with his dedication to helping families and retirement plan providers build durable wealth, while simplifying their financial path. Learn more at www.alliantwealth.com.