So far this tax season I have received the most comments from client's about their tax refund amounts this year versus last year. I want to make sure everyone looks at their TAX LIABILITY for this year versus last year, as employers changed withholding during the tax year. What your tax liability is this year is the important number to look at when making a comparison to last year.
Tax time is here, and if you’re like most Americans, you’re wondering how these new tax codes are going to affect your filing. Get ready. This year’s tax filing will reflect the biggest changes we seen in years. For some, it’s going to be intimidating, but the prospect of tax reductions and savings will be the most significant incentive applauding these new tax codes.
Before closing the tax year, make sure you identify the potential challenges and advantages to the new tax rules. The three biggest changes affect individual taxpayers, specialized groups taking advantage of the selected deductions for minimizing taxable incomes and corporate (business) tax incentives.
1. 2018 Withholding Impacts
In many cases, paychecks have increased with the new tax code. Depending on the taxpayer’s state of filing however, paychecks could be less if you’re living in a state or city with local tax increases. The same goes for freelancers or contract workers.
If you’re not sure about your withholdings, take a look at the tax rates. Here’s why: The old W-4 forms didn’t include the change in standard deductions. There were allowances on the old withholding forms that aren’t permitted with the new tax laws. If you didn’t resubmit a new W-4 form, your withholdings could be incorrect.
The last thing you want is to end up owing taxes, penalties, and accumulating interest.
2. Alternative Minimum Tax (AMT)
The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, substantially changed the AMT. About 5 million taxpayers were expected to pay the AMT under the old law, but only 200,000 are expected to pay the AMT under the new law. To understand the AMT, you first have to understand it's history, which dates back to 1969. It was designed as a supplemental income tax, whose purpose was to make sure high-income earners paid their fair share of taxes, no matter how many deductions were legally available under the current tax rules.
Income thresholds were established to coincide with the taxpayer’s filing status. The action prevented taxpayers from taking advantage of the exemptions in an attempt to amplify tax reductions and avoid paying taxes. Today, taxpayers calculate alternative minimum taxable income (AMTI) based on qualifying deductions.
The 2018 exemptions are up from 2017; single or heads of household see an increase of $16,000, $24,900 for married filing jointly and $12,450 for married filing separately.
- $70,300 for single or heads of household
- $109,400 for married filing jointly
- $54,700 for married filing separately
More significant changes appear in the 2018 AMT phase-out income thresholds. Exemptions are reduced by one dollar for every four dollars of AMTI above the phase-out thresholds.
- $500,000 single, heads of household or married filing separately (from $120,700).
- $1,000,000 for married filing jointly (from $160,900).
3. Doing Business in the U.S.
New rules apply to all businesses, including C corporations, pass-through entities, and sole proprietorships. Even though the new business tax codes come with restrictions and a list of exceptions, most are beneficial and a welcomed change for business.
- C corporations are taking the reduced tax rate of 21 percent from the 35 percent as a benefit to the bottom-line.
- Business property and equipment (deductions) got an expense cost increase from $500,000 in 2017 to $1 million in 2018.
- Bonus depreciation for property, building and equipment is now 100 percent for five years, up from 50 percent.
- Pass through businesses got a tax break with a 20 percent deduction on qualifying income. But there are restrictions and phase-out limitations for certain types of service businesses.
- Limitations on interest deductions for businesses averaging gross receipts of more than $25 million over three prior years.
It may be time for a new tax strategy. Changes for personal, business and corporate deductions have new limitations imposed and may not be as beneficial as they were in the past.
Pre-planning and meeting with a financial professional may illuminate your situation more clearly and provide you with a new tax perspective. The new tax provisions are structured to offer tax individual advantages and business savings when used accurately.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.