The Tax Cuts and Jobs Act, which was passed last year, brought many tax law changes that are affecting most taxpayers – including employees, retirees, those working in the sharing economy, and anyone with dependents.
To avoid a surprise bill in April, the IRS is urging taxpayers to complete a “paycheck checkup”. Doing so will ensure they are having the correct amount of taxes withheld from their paychecks for the rest of the year.
Below are some of the law changes that could affect taxpayers’ tax liability and the amount they need to have withheld:
- Changes to tax rates and brackets.
- Expansion of the child tax credit:
- Offers up to $2,000 per qualifying child (under 17).
- Begins to phase out at $400,000 for joint filers, and $200,000 for other taxpayers.
- $500 credit for qualifying dependents other than children under 17.
- The standard deduction nearly doubled to $24,000 for joint filers and $12,000 for singles.
- A $10,000 cap on combined deductions for state and local property, sales and income taxes.
- New limits on deductions for some mortgage interest and home equity debt.
- Higher limits on the percent of income a taxpayer can deduct as charitable contributions.
- No deductions for miscellaneous expenses. In prior tax years, these had to exceed 2 percent of a filer’s income to qualify. These included investment expenses and unreimbursed employee expenses such as travel, meals, entertainment and uniforms.
- Those involved in a sharing economy need to make sure they pay their taxes either through withholding from other jobs they may hold or through estimated taxes. The IRS has created the Sharing Economy Tax Center to answer questions and provide forms for the sharing economy.
- While not part of the new law, those over 70 and a half can make charitable contributions directly from their IRA which reduces their adjusted gross income and ensures that they receive a tax deduction for their donations.
If a taxpayer needs to adjust their paycheck or pension withholding amount, it’s better to do so sooner rather than later to ensure withholding takes place evenly throughout the remainder of the year and to prevent an unexpected tax bill and penalties next tax season.
The best tool to help determine correct withholding amounts is to use the IRS Withholding Calculator. Or contact your accountant for assistance.
If you have any questions, check out the IRS Tax Reform Tax Tips or contact your accountant.