A new tax law passed last year that included many changes that will impact taxpayers across the U.S. Among those impacted will be many Americans that will owe taxes on their 2018 returns. The Government Accountability Office (GAO) recently issued a report warning that more than 4.5 million taxpayers will owe next April, unless they adjust their withholding amounts now.
One of the biggest changes to your taxes this year is the change to standard deductions and personal exemptions. To begin with, the standard deductions have changed dramatically.
They have basically doubled… for a taxpayer who filed single in 2017, the standard deduction was $6,350, for 2018 it will be $12,000. For a taxpayer who filed head of household, $9,350 goes to $18,000. For a taxpayer who filed married joint, $12,700 goes to $24,000.
The personal exemption, last year it was $4,150 for each person on the tax return, goes away. The amount of your income that doesn’t get taxed is the standard deduction plus personal exemptions. In 2017, if you were married with 1 child, your standard deduction was $12,700. Your personal exemptions, $4,150 each, was $12,450. So, your total income you didn’t have to pay taxes on was $25,150. This year, only the standard deduction applies, or $24,000 that you don’t have to pay tax on. There isn’t much change here.
If you are single, filing head of household, with 4 dependents, the picture is much different. For 2017, the standard deduction was $9350, Personal exemptions, you and 4 dependents, 5 personal exemptions, 5 times $4,150, was $20,750. The total income you didn’t pay taxes on was up to $30,100. For 2018, only the standard deduction of $18,000 applies. The difference here is $12,100 more that you have to pay taxes on this year.
The tax law limits or eliminates many itemized deductions claimed taxpayers for 2017. The biggest contributors are the new limits on state and local tax deductions, a restriction on deduction for home mortgage interest and the elimination of the deduction for job-related expenses.
Taxpayers most likely to owe in 2018 are those who itemize deductions. The GAO looked closely at this group and stated specifically, married taxpayers who itemize deductions, with two children under age 17, income exceeding $180,000 from one or more jobs and who have $20,000 or more in nonwage income (dividends, interest or capital gains) are highly likely to pay more tax when they file their 2018 returns.
There are a few things you can do now to limit the stress of owing more in taxes. If it is possible, save money toward your tax bill each month by starting a money market fund, they are currently paying around 2 percent interest. You can also increase the amount of tax withheld from your pay for the remainder of the year by changing your W-4 form with your employer. By doing this, it will lower the number of dependents. Your employer will deduct more from your paycheck for the federal income tax.
Remember, the more income you have, the more you will need to reduce your allowances you claim on the W-4 or the more you will need to save to pay on your upcoming tax bill.
It’s important to know what your tax situation is now because having too little money withheld could result in an unexpected tax bill or even a penalty when you file your 2018 return. By doing this checkup now, you’ll still have time to make any necessary adjustments.
Yes, it is all very confusing! We can help you sort it out. Contact us today.