Planning for 2018 Taxes

Planning for 2018 Taxes: What You Need to Know

Late last year, Congress passed the Tax Cuts and Jobs Act, also called “tax reform.” The TCJA implemented a number of changes and reforms to our tax code and will have a direct impact on your 2018 filings (to be filed next year). Planning for 2018 is important, so it’s important to understand major changes made to the tax code by the TCJA.

Here’s what you need to know about how those changes will affect your tax situation through this year (and beyond).

Tax Brackets Have Changed

The tax brackets for all taxpayers have changed. Click through the link for the full list of changes, but for the two types of clients we work with most, the changes are:

Single Taxpayers

Income Tax Rate
$0 – $9,525 10%
$9,525 – $38,700 12%
$38,700 – $82,500 22%
$82,500 – $157,500 24%
$157,500 – $200,000 32%
$200,000 – $500,000 35%
$500,000+ 37%

Married Filing Jointly

Income Tax Rate
$0 – $19,050 10%
$19,050 – 77,400 12%
$77,400 – $165,000 22%
$165,000 – $315,000 24%
$315,000 – $400,000 32%
$400,000 – $600,000 35%
$600,000+ 37%

The Standard Deduction Has Increased

The standard deduction is the amount that reduces your taxable income if you choose not to itemize.

In 2018, the standard deduction has increased to:

  • $12,000 for single filers
  • $18,000 for heads of household
  • $24,000 for married couples filing jointly

The increased standard deduction may result in fewer people choosing to itemize. Of course, choosing the standard deduction or going down the path of itemizing is entirely dependent on your specific situation and finances.

In fact, let’s look at some of the changes made to itemized deductions.

Itemized Deductions

Itemizing makes sense when your deductions add up to an amount higher than the standard deduction for your filing status. The TCJA made changes to many itemized deductions:

  • The mortgage interest deduction was lowered to $750,000 for mortgages taken out after December 15, 2017.
  • The home-equity loan interest deduction was eliminated until 2025.
  • The deduction for state and local income and property taxes (SALT) has been limited to $10,000.
  • Casualty loss deductions have been limited to only presidentially-declared disasters.
  • The medical expense deduction has been changed as well. You may now deduct any unreimbursed medical expenses over 7.5 percent of your adjusted gross income (AGI).
  • The deduction for charitable donations has risen from 50 percent to 60 percent of your total AGI.
  • Many other miscellaneous deductions have been repealed or left unchanged. A qualified CPA or accountant can help you make the most of applicable deductions.

Child Tax Credit Increase

The child tax credit has been increased to $2,000 per child under 17 years old. Additionally, a $500 credit is available for dependents who don’t qualify for the child tax credit.

Changes to Section 529 Plans

Prior to the TCJA’s passing, funds in section 529 college savings accounts could only be used for higher education purposes. Withdrawing funds for any other reason would treat the earnings portion of a withdrawal as taxable income, with an additional 10 percent tax.

The TCJA changed how college savings accounts are treated. Funds can now be applied toward tuition at elementary, secondary, public, private, and religious schools, up to an annual $10,000 limit.

Changes to Retirement Savings

The contribution limit has increased to $18,500 for the following retirement plans:

  • 401(k)
  • 403(b)
  • Most 457 plans
  • And thrift savings plans

Perform a Paycheck Checkup

With the passage of tax reform, the IRS recommends performing a “paycheck checkup.” You should also reconsider how much tax is withheld per paycheck.

The IRS claims that the average tax refund is $2,800. With that in mind, you may wish to withhold less tax per paycheck so your take-home pay is increased. If not, it may be wise to protect against having too little tax withheld or else risk being on the hook for a tax bill at tax time next year.

The IRS recommends that the following groups check their tax withholding:

  • Two-income families
  • People working two or more jobs or who only work for part of the year
  • People with children who claim credits such as the Child Tax Credit
  • People with older dependents, including children age 17 or older
  • People who itemized deductions in 2017
  • People with high incomes and more complex tax returns
  • People with large tax refunds or large tax bills for 2017

The IRS has provided a handy withholding calculator to help you determine which option is best for you by taking into account your family income and situation.

Plan for Tax Time

TL;DR: Accounting is happy to chat with you to help you decide your best course of action and plan for tax time.

TL;DR: Check your withholding, it probably is not enough. Or give us a call to let us run the numbers.

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How to file an extension

If you’ve waited this long to contact a tax professional or CPA about filing your taxes, you’ve likely been told the bad news: they’re booked. Luckily, you have a get out of jail free card, called an “extension.”

An extension buys you a grace period where a professional can still assist you after the deadline to file your taxes. An extension does not, however, extend the time you have to pay your taxes. If you believe you’ll owe taxes, you should make a payment now, using the following options:

Reason for Payment: Extension
Apply Payment To: 4868 (for 1040, 1040a, 1040EZ)
Tax Period for Payment: 2017

The deadline for filing an extension is April 17. You can e-file an extension for free. Alternatively, you can find Form 4868 on the IRS website to file for an extension via mail. It will need to be postmarked by April 17th in order for your extension to be granted.

Filing an extension will give you until October 15, 2018 to file your tax return. You will still be required to pay your taxes by April 17th.

TL;DR: You procrastinated having your taxes done. File an extension, then get help.

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I made some money, now what?

Alright – so you are a freelancer, maybe working on the side, or a small business owner making some money, which is awesome. The downside is you need to pay taxes on that income, and you need to figure out what you owe.

Do you need to make estimated tax payments?

If you fall into both of the following categories you had better pay up:

  • You are expecting to owe at least $1,000 or
  • Your withholding will be less than: the smaller of 90% of your 2015 taxes or 100% of your 2014 taxes.

I am not going to cover the guidelines if you are a farmer or a fisherman. The important part is that you can usually pay in 100% of your 2015 taxes and be safe unless you hit $150,000 in income. Then it is 110% of your 2015 taxes. Now, if your income moves around a lot, and you have time to calculate it, you can take the option of paying in 90% of your 2016 taxes.

You have 2 choices of when to pay your taxes:, either 100% on April 15, 2016 or in equal payments on:

  • April 15, 2016
  • June 15, 2016
  • Sep. 15th 2016
  • Jan. 15, 2017

If you want to pay in 100% of your 2015 taxes, you are done with your estimate calculation and you can pay online: www.irs.gov/payments

That wasn’t too hard, was it?

Uh, wait. What if it is my first year in business?

Well, then we have to do a bit of math or use a friendly app. Each quarter you will need to pull your net profit from your accounting software(if you don’t have an accounting software, please talk to an accountant), and you will need to calculate your tax on that net profit.

You can either do the math yourself, or there are various apps out there that will do it for you:

  • Tax Calculator by TaxSlayer – Apple App Store, Google play or Web App
  • Total Tax Insights by AICPA – Web App

I suggest using one of the apps if you don’t want to learn the details. If you do want to learn the details check out 2016 Form 1040-ES.

As always, please consult your tax advisor.

TL;DR: Pay in 100%(110%) of your 2015 taxes, or use an app to calculate your taxes for you. Better yet, get a tax advisor.