The Tax Cuts and Jobs Act of 2017 presented the single biggest change in U.S. tax policy since the Tax Reform Act of 1986; it had literally been more than 30 years since we had seen such sweeping legislation alter the nation's tax landscape.
And now that we are nearing the end of our first tax filing season under this new TCJA era, people are wondering what might be in store for them this year as they prepare to submit their tax returns to the IRS.
Will the wider tax brackets and lower rates give me more of a refund? Will the loss and rollback of several previously allowed deductions mean that I will owe more? Should have I changed my withholdings to better deal with this?
All are reasonable questions, and many others exist as well. And the best advice that can be give this year, in year one of a new tax era, is this: people need to manage their expectations when it comes to dealing with the affects the TCJA. Less withholdings during the year equals less of a refund than usual for many taxpayers (or owing more).
Things 'Not Exactly As They Seem'
Without question there was a lot of excitement for individuals and married couples going into this year, with the notion of lower taxes and wider brackets giving way instantly to the hopes of more money in their wallets.
Only now people are seeing that things maybe weren't exactly as they seem, as those benefits may have been offset by fewer deductions and less of an incentive to itemize.
Time will tell, and without question many may be looking to make changes to their withholdings once this tax season is behind them.
With that in mind, here are important considerations for people, with tax day now just a few days away.
To withhold or not to withhold. This is an age-old question that carries even more weight today—am I better off keeping my withholdings down during the year and then dealing with it at tax time, or increasing them? Did you have more money during the year that now leaves you in a bind as you pay your tax bill this April? If so, perhaps a change needs to be made.
No more personal exemptions. If people didn't know this before, they will find out soon enough—the personal exemption has gone away. But they might be able to get a dependent tax credit of up to $2,000 instead.
Standard deduction vs itemized deduction. This is a big one, and with the limitation placed on deducting state taxes, it comes even more front and center. Am I still able to itemize, or is the new $24,000 standard deduction the route I take? This is a question every filer should be asking right now.
Planning for next year. Once this filing season comes to an end, it's time to revisit and possibly make adjustments for Year Two. We've already discussed whether withholdings should be altered, but there are other questions as well. Should I consider a Donor Advised Fund for my charitable contributions in order to take advantage itemizing my deductions every other year? All are good questions which should be addressed sooner rather than later.
The truth is this is just the first year of this new tax era, and every dramatic change requires time for people to educate themselves on the nuances and truly understand it.
Which is why the best advice is to start asking the challenging questions shortly after Tax Day comes and goes, and begin to make necessary adjustments now.
It's a better idea than waiting until the last minute.
About the author: Andrew J. Lattimer, CPA, MST is a tax partner with blumshapiro, the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 500, offers a diversity of services, which include auditing, accounting, tax and business advisory services. blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies. To learn more visit us at blumshapiro.com.