Personal Wealth Management / Financial Planning

A Tax Day Q&A

Featuring helpful information for the current tax season and tips on preparing for next.

Taxes! With April 15 right around the corner, this (typically very dry) subject is on many folks' minds. That is perhaps doubly true this year, given this is the first filing season since 2017's Tax Cuts and Jobs Act (TCJA) took effect. Headlines are jam-packed with stories of lower tax refunds (or bills due), unexpected negative surprises and more. While there is little that can be done about 2018 at this point, it isn't too early to think ahead. To that end, we compiled some common questions—and answers—to hopefully help you make future tax days as uneventful as possible.

“It looks like I owe more than anticipated. I thought 2017’s tax reform would lower my taxes—what happened?”

TCJA may indeed have reduced your taxes—but sprinkled the gains throughout the year in the form of bigger paychecks. Here’s how. Under America’s system of automatic tax withholding, employers carve out a chunk of each worker’s paycheck for Uncle Sam. Post-TCJA passage, the Treasury revised its withholding guidelines for employers, aiming to “deliver the benefits of the tax cuts as soon as possible, to as many Americans as possible.”[i] The result: Employers likely withheld less, putting more money in your pocket throughout the year. But also, quite possibly, fewer withholdings means a smaller refund (which may be good news—more on that later) or a tax bill.

Employers don’t totally control your withholding, though. You can adjust it yourself by changing how many tax allowances you claim on your W-4. If you had to pay Uncle Sam this year, you may wish to withhold more. This is particularly true if you withheld less than 90% of tax due. In a typical year, the IRS assesses penalties for withholdings that don’t reach that threshold. They gave filers more leeway this year to make up for TCJA confusion. But that doesn’t seem set to repeat. So check your allowances! While it is too late to make changes for 2018 tax purposes, updating your W-4 for the current tax year could help you avoid an unpleasant surprise next April. 

“I think my withholding was fine. Any other reason my tax bill might be higher than expected?

Yes—you might just owe more under the new tax regime. Like all tax changes, the TCJA created winners and losers. Many benefited from the doubled standard deduction—but those who used to itemize heavily probably see higher costs now, as the bill nixed or capped many deductions. Folks with big mortgages living in high-tax states were among the hardest-hit. Also chopped: an array of miscellaneous deductions, including unreimbursed business costs, hobby expenses, tax preparation fees and investment expenses. Many of these are pretty minor, and the higher standard deduction likely offsets them for most filers. But that isn’t true for everyone.

“Drat. Are there other ways to lower my tax payment?”

Perhaps! Until April 15, you can still contribute to a traditional IRA or Health Savings Account (HSA) for tax year 2018 if you haven’t hit the contribution limits yet. Depending on your situation, these contributions may be deductible for non-itemizers. But that is about it for 2018 taxes. In future years, though, folks aged 70 ½ years or older who are required to take distributions from their retirement account(s)—known as Required Minimum Distributions (RMDs)—should keep in mind they can donate their RMD to charity if they don’t need it to meet expenses.[ii] While there was some uncertainty over how the TCJA would affect this popular rule—given you previously had to itemize to claim it—recent IRS guidance states these contributions are deductible even if you take the standard deduction.

“I got a big refund. That’s good, right?”

Not unless you were trying to extend the US federal government an interest-free loan. A refund returns excess tax payments withheld from your paycheck during the year—but those dollars were yours to begin with. You could have spent or invested them yourself. Heck, you could have even invested them in Treasurys—still lending to the federal government, but at least with interest. The remedy, again, is to check your withholding and adjust your tax allowances—likely upwards, in this case. Doing so should reduce next year’s refund and increase your take-home pay.

“Help! The IRS called, and it seems like I’m in trouble. What should I do?”

Hang up! It isn’t the IRS. Either the caller is a friend playing an unhelpful practical joke, or they are a scammer—someone trying to frighten you into sending them money. If you were actually the target of an audit or other IRS action, they would contact you initially via letter, official IRS letterhead and all. Same goes for emails ostensibly from the IRS. Email isn’t how federal bureaucracies like to communicate. Watch your mailbox, not your inbox. Educating yourself on common tax capers can go a long way, too. Although fraudsters’ tactics are getting more sophisticated, there are ample resources available to help you spot them. Check out the IRS’s collection of scam strategies here—as well as Elisabeth Dellinger’s 7/24/2018 column, “The IRS Scam Is Dead. And Back.”

[i] “New Withholding Guidelines Under the Tax Cuts and Jobs Act Will Increase Take Home Pay,” US Treasury Department, 1/11/2018.

[ii] Subject to limits.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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