MON, MAY 7th, 2018
As we take a deep breath after filing our 2017 taxes and begin to look forward to warmer temperatures and Spring flowers, we should take a few minutes to focus on setting ourselves up for tax success in 2018.
Many of us have enjoyed a bit of extra income as the new tax rates have started to flow through our paychecks. While enjoying the extra cup of coffee, lunch or additional 401k contribution that the extra income is affording us, we need to pause and shift our attention to our tax withholding for 2018. With the tax law changes, certain itemized deductions that we have become accustomed to are now limited. How will the change in legislation impact us when we file our 2018 taxes a year or so from now?
2018 Tax Changes
2018 brings a host of new tax changes. We have new marginal tax brackets and rates, capital gains brackets, standard and itemized deductions limits. For 2018 the standard deduction amount is now $12,000 for individuals, $18,000 for head of household, and $24,000 for married couples filing jointly. For additional detail, our 2018 Planning Guide is designed as a quick reference for the latest tax rates, savings and retirement contribution limits, etc.
One of the largest tax changes is that the state and local tax deduction including real estate taxes is capped at $10,000. With this limitation and others, many people may find that they are better off from a tax perspective to use the standard deduction rather than itemizing on their taxes.
A Helpful Tool
What will your tax pictures look like for 2018? And, will your 2017 deductions now be limited in 2018? To answer these questions, the IRS has built a very helpful tool, the IRS 2018 withholding Calculator: https://apps.irs.gov/app/withholdingcalculator/. The tool is simple and quite user friendly.
Before accessing the calculator, take the time to look at your 2017 tax return and understand what deductions you took for the year. Armed with an understanding of your 2017 tax return numbers, collect your most recent pay stub(s). You will need to reference your pay stubs in order to enter necessary information into the calculator. You will also be asked to enter the amount of tax that you have had withheld year-to-date. Additionally, you will also need to enter any contributions to tax deferred retirement plans such as your 401k, and any amounts that you contribute to your cafeteria plan or health savings account (HSA).
The Calculator then asks a series of questions leading to a results page which informs you of your anticipated income tax, total dollar amount of your withholdings anticipated at your current withholding rate, and whether this results in an under- or over-payment of tax. The calculator then provides suggestions of adjustments to consider making on your Form W-4 including filing status and the number of allowances to claim.
Update your W-4
Here is where action is required on your part. If you would like to update your Form W-4, you will need to coordinate with your employer or HR department. Although it may sound painful, this quick and easy exercise can help you effectively manage your tax obligation in a tax year with many new variables. We are over a quarter of the way through 2018 so be sure to follow through with these updates so to set yourself up for less stress during tax time a year from now.
If you have questions about the tax changes or logistics of the calculator, please reach out to me at 801-487-3700 or firstname.lastname@example.org. I would be happy to help you.