Now More Than Ever Before Everyone Needs to Do More Planning Before Filing Taxes...Like Seriously.
The Truth About Recent Tax Law Changes (Major Changes)
The income tax system under went major changes and doubled the standard deduction, took out personal exemptions and cut into individual income tax rates.
So, let’s not act like this is a game. These changes will affect how much money taxpayers are bringing home on their paychecks. Not only that, but it’s affecting what they would normally get back for their annual income tax refund.
Be aware the Tax Cuts and Job Act marked the first change in tax code in 30 years.
It’s true the Tax Cuts and Job Act does cut taxes across the board. It took down individual income tax rates from 39.6% to 37% and corporations from 35% to 21%. It also nearly doubled the standard deduction for singles from $6,350 (in 2017) to $12,000 (in 2018), limited itemized deductions and did away with personal exemptions.
You know, the $4,050 deduction you could get for yourself and each dependent you took care of in your household… yeah, many are just now realizing it’s now gone.
The truth is, even in the midst of the tax law cuts, tax accountants should be explaining to taxpayers that the tax law reduced their taxes, but they could still owe more upon filing. The IRS has updated the W-4 form. This form determines the amount withheld from income taxes based on you and your spouse’s pay and number of dependents. Needless to say, this form is very important and should be updated being that it can assist in how much or how little taxes you owe or get back in a refund.
Most taxpayers who claimed itemized deductions previously or had multiple dependents kept more take home pay throughout the year, but most likely did not pay enough in 2018 and owed in 2019. In other words, that may have worked in the past, but it’s not going to work moving forward with the new tax laws.
Even with the IRS issuing 111.6 million refunds for 2018 returns filed through November, the average taxpayer is now getting a refund of about $2,850.
Updates on Standard & SALT Deductions
Few people claimed the itemized deduction since the standard deduction pretty much doubled. In 2017, about 42.2 million taxpayers took the itemized deduction as of July 25, 2018. With the Tax Cuts and Jobs Act, only about 14.7 million households claimed those same itemized deductions in 2018 as of July 25, 2019. That’s 27.5 million households no longer claiming itemized deductions! That’s enough to cause anyone to stop and think about what deductions they are claiming.
If you’re claiming the state and local tax (SALT) deductions on your return, you may want to rethink this as well. The limit to the SALT deduction is now $10,000. This has had a drastic affect on taxpayers as they are used to claiming over $20,000 in some states.
In 2017, about 40 million Americans took this deduction. However, it drastically dropped in 2018, where only about 14 million took the deduction. Again, another 26 million taxpayers! I would say this tax law is worth the conversation to call your accountant to determine what you’re doing on your taxes.
The controversy over this deduction has affected states to the point where they are going into litigation against the federal government about it. It even has President 45 moving out of the state of New York over it.
All this talk about how the new tax law would give taxpayers lower tax liability through the year to only end up owing when they filed. So, you took home more pay, are limited in what you claim in deductions, and end up with a small refund, no refund or owing taxes. That doesn't seem fair, does it?
Quite a few items in the current tax law are temporary and will expire in 2025. Good or bad? Who knows? …and only time will truly tell.
The Shift to Tax Planning
Normally, most taxpayers do their normal routine of running to file their taxes quickly each year. The new tax laws may have more thinking about not going to traditional major income tax processing locations, but actually seeking out a tax accountant or CPA to file for them so that they get a better understanding of the tax laws that are affecting their refunds.
Income tax processing isn’t enough anymore. This new tax law is affecting taxpayer’s everyday life, from what they bring home on their checks, to what they owe (or get back) during income tax filing.
Tax planning is becoming more crucial for the average American and recent tax law changes make it critical to strategically approach tax filing year round. Understanding your approach to tax withholdings and how to effectively use your accountant to draft a plan for your finances and taxes is critical as well.
Filing your taxes without planning is simply not an affordable option anymore. Tax planning has to be done.
Upcoming Tax Planning Event in Cleveland, OH
The HOPE Accounting Firm will be hosting a business and personal tax planning info session at the Urban League of Greater Cleveland on January 27, 2020.
This is a free event for all. Seats are limited so visit the link below to register today!
Have questions? Want more information about this blog topic? Contact the HOPE Accounting Firm at 216.744.9303 or at firstname.lastname@example.org.