{5 minutes to read} We are already in the heat of summer; yet the atmosphere surrounding the unknown impact of the new tax law still creates a chilly feeling. While you may just want to wait to see, that is, be more reactive in nature, we don’t suggest you do that as the new tax law will impact almost everyone, some more than others. This article is geared towards providing guidance to taxpayers with withholdings, whether from a W-2 job, retirement, or Social Security.
Recap: The 2017 Tax Cuts and Jobs Act (TCJA) that overhauled the Tax Reform Act of 1986 has significantly changed the way we view taxes. For the most part, the provisions will be effective for eight years, from 2018-2025. (Please refer to our previous article Welcome to 2018 Tax Season sent in January. The article details the areas that will be impacted on your 2018 tax return.)
What has changed since the last communication?
The tax rules continue to evolve, at least from a practical tax reporting viewpoint. In the last article, we reported deductibility of home equity mortgage interest. The IRS took a stand to clarify what interest can be deducted. In IR-2018-32, Feb. 21, 2018, the IRS said that “despite newly-enacted restrictions on home mortgages, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labelled.” However, as under the prior law, if the money is/was used to pay for personal debt, it is not deductible. (Read more from the IRS here. Also, here is the 2018 Tax Brackets Flyer from Edward Jones. See which bracket will apply to you in 2018.)
What was then, is not now!
In prior years, many Americans who paid their Federal income tax through withholding taxes taken out of their paycheck, found at the end of the year that they had overpaid and received a nice Federal tax refund. The law change this year is structured so that most people will see less tax withheld every pay period resulting in increased “take-home” pay, rather than a refund check at the end of the year.
As previously mentioned, if you have deducted any of the expenses below in the past, you may be faced with an unwelcome increase in your tax bill next spring, since some of these expenses will be limited or eliminated, thus increasing your tax liability:
- Property tax on your primary or secondary home;
- State and local taxes paid from your income (most states have income tax reporting);
- Mortgage and home equity interest (new mortgages, which included refinances will be affected if the loan exceeds $750,000). Existing (before 2018) mortgages under $1M are not affected;
- Employee and job expenses – This can be a game changer for many. There may be more tax advantages for some individuals to work as independent contractors. However, there are other hoops to jump thru in order to authenticate your classification as an independent contractor. Employers may be faced with other tax issues from the Department of Labor.
People often counted on their tax refund check to help ease their financial situation in some way. With the new tax law, you may go from a history of receiving refund checks to a balance due to the government at tax time.
We are quite concerned about the unwelcome surprise you may receive at tax filing time next spring. The good news is that we still have time to change the year-end result if we act soon.
How can you mitigate any surprises next spring?
- If you are an employee with withholding (whether from a W-2, retirement, or Social Security), we very strongly suggest that you set up a Withholding consultation with us.
- If you have types of income other than the types mentioned above, we suggest you set up a tax planning consultation with us.
Don’t be reactive! It is URGENT that every client with withholding, whether from a W-2 job, retirement, or Social Security, contact us by July 31, 2018 to set up a time to meet so we can calculate your 2018 tax situation and withholding, and then make changes if needed.
Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com