The Tax Cuts and Jobs Act (TCJA) made fundamental changes to the U.S. tax code, and the 2018 returns were the first time most taxpayers felt the impact of these sometimes painful changes.
Most still don’t understand it. In an April 2019 Gallup poll, 43% of Americans said they were unsure how the new tax law affected them personally. Despite a stated effort to simplify the federal withholding and tax filing process, the tax code is still complex.
In theory, your withholding amount from earnings should equal your tax liability; otherwise you are loaning your money interest-free to the government. But IRS formulas tend to err on the high side, partly because people usually dislike owing a balance and are often happy to receive a tax refund.
Employers estimate federal tax bills based on the number of exemptions claimed on your W-4 Form and on IRS calculation tables. The IRS rather quickly gave 2018 calculation tables reflecting the new rates and rules. However, the agency did not replace the W-4 Form and worksheet, which are based on exemptions, deductions, and credits that were reduced or eliminated under the new tax law.
This resulted in smaller refunds or higher tax bills than expected for some, especially dual-income households in high-tax states with more complicated situations. The Treasury estimated that 21% of taxpayers would be subject to under-withholding because of the TCJA, compared with 18% if the tax law provisions had not changed.
If you owed a large amount of money for 2018, increasing your withholding could help avoid a similar fate next April. You might also reevaluate your withholding if you received a large refund. You could make larger retirement contributions instead or take home more of your pay and put it to better use. This is why we have annual reviews to look for chances to save.
The IRS (irs.gov) has an online calculator that can help you find the appropriate amount of withholding. You will need to complete and submit a W-4 to your employer to make any adjustments. A new W-4 Form for the 2020 tax year is in the works but isn’t expected to be available until later this year.
Measuring the Impact
How you fared under the TCJA depends on a variety of factors, such as how much you earned, your filing status, the ages of your dependents, and where you live. Undertaking a thorough side-by side comparison of your 2017 and 2018 returns could help you identify changes that affected your bottom line. Be sure to note differences in your allowed deductions, taxable income, and total tax liability.
New tax brackets are likely to mean that much of your income is taxed at lower rates: but other provisions may add to that.
Standard deduction amounts for 2018 roughly doubled to $12,000 for single filers and $24,000 for married taxpayers filing jointly. However, personal exemptions for yourself, your spouse, and your dependents are no longer available. The expanded child tax credit may offset the loss of exemptions for many taxpayers, but the math may not work out in your favor if you’re a family of four or more.
A number of tax deductions commonly used by high earners have also been modified, capped, or eliminated. For example, the itemized deduction for all state and local taxes, including property taxes (SALT) is now capped at $10,000. This provision caused tax increases for many taxpayers in high-tax states. On the other hand, the overall limit on itemized deductions that applied to higher-income taxpayers (known as the “Pease limitation”) was repealed, and fewer taxpayers are subject to the alternative minimum tax.