By, Karen Wiseman, EA
The passage of the Tax Cuts and Jobs Act (TCJA) will change the way tax is collected for most taxpayers beginning this year. Following the passage of the bill last December, those of you who are W2 employees likely saw a bump in your take-home pay as the result of the new tax law. Although a welcome bonus, it doesn’t necessarily mean that you won’t have a tax liability at the end of the year. Your withholding rate is based on your gross W-2 wages; but it does not take into consideration additional income in the form of capital gains, a second job, rental income, contracting, etc. If you have additional income, whether, from those mentioned or another source, you may need to adjust your federal withholding.
There is no question that everyone will be impacted including those with non-W2 income that is not subject to withholding.
Here are some of the more notable changes in the new TCJA law:
- The increase of the standard deduction (was $12,700 MFJ to $24,000 and
$6,350 single to $12,000)
- Removing personal exemption amounts (was $4,050 for each dependent on the return now included in that 24,000/12,000 deduction)
- Increase of the child tax credit ($2,000 per qualifying child under 17)
- Limiting or discontinuing certain deductions such as home equity loan interest
- Unreimbursed employee business expenses that were subject to 2% floor are no longer deductible (make sure your employer has a reimbursement policy in place)
- Unfortunately, for those of you hoping to escape that healthcare penalty, it does not go away until 2019.
In addition to the changes in the law, taxpayers will be using a completely revamped 1040 form for 2018 with a host of new schedules that aren’t even finalized yet.
The W4 form you are provided when you start a new job or request a change in your Federal withholdings has been revamped as well. There is no longer a space to enter the number of allowances on the new W-4. Instead, four new boxes will instruct you to predict your income and deductions. To help assist you in calculating this information the IRS recommends using their withholding calculator, available through IRS.gov. If you don’t want to make changes, the Federal Government will allow taxpayers to continue to use their old W4 status with no need to file a new one.
If you are not considered a W2 employee, you should be paying your taxes through quarterly estimated payments.
For those with domestic businesses, Section 199A created a deduction for Qualified Business Income (QBI). Those businesses that are operated as a sole proprietor, partnership, S-Corporation, trust or estate may be eligible for up to a 20% deduction based on their QBI.
If your gross income on your personal return exceeds $315,000 MFJ/ $157,500 Single, the QBI deduction is limited. Certain service-based trade or businesses could have their deduction phased out completely if your taxable income exceeds those levels.
Reviewing your tax situation before the end of the year is a good idea whether you file on a 1040 or you have corporate returns. Your tax professional can assist you with more detailed information on the new law. Contacting them now can help you understand and plan for how these new changes could affect you.
Wiseman Tax is an Enrolled Agent firm specializing in tax and representation. We also provide accounting services to small businesses. www.wisemantax.com
This material has been prepared for informational purposes only and it is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.