The Tax Cuts and Jobs Act of 2017 introduced significant changes to the personal income tax code for 2018. Some changes reduced the effective tax rate for many people, but certain groups of taxpayers may see their federal taxes increase. Even if your tax rate was reduced, changes to salary withholdings could leave you with a large tax bill when you file your 2018 federal tax return.
Here are a couple of the major changes that could increase your tax bill:
- Limitation on State and Local Tax deductions – Beginning in 2018, the most that can be deducted for state and local taxes is $10,000. This includes state income taxes and local property taxes. High-income homeowners in California are the ones most likely to be affected by this change. Before 2018, working homeowners were likely to deduct tens of thousands of dollars in state and local taxes on their Schedule A, but that has now been capped.
- Elimination of personal exemptions – In 2017, you could deduct $4,050 for every individual in your tax household. This deduction was eliminated and offset by an increase in the standard deduction, lower tax rates, and child tax credits. However, if you used personal exemptions to decrease the tax withholding from your paycheck, you might end up underpaying for the year.
A tax professional can help you estimate the impact of these changes. We recommend that you contact your CPA before the end of the year and ask for a tax estimate. They can collect partial info about your income, deductions, and tax payments and help you determine if you will have additional taxes due. They may also be able to help you identify ways to reduce your tax bill. Having this knowledge in advance will give you time to save up for the payment.
Waiting until April to find out that you owe the IRS thousands of dollars can create significant financial hardship.