As some Americans are already discovering, certain people will be more affected by tax reform than others, and not all the surprises are pleasant ones.
The Tax Cuts and Jobs Act, passed in December 2017, enacted a number of broad changes: It introduced new tax brackets, included an expanded child care credit and changed the way itemized deductions are factored in, for example.
Going into this tax season, about 28 percent of Americans don't understand exactly what changed and almost half have no idea how the changes affect their tax bracket. Adding to that uncertainty are reports that, during the first week of tax filing season, the average tax refund is down 8.4 percent.
"Taxpayers should definitely adjust their expectations when it comes to their tax refunds this filing season," says Logan Allec, a CPA and owner of the personal finance blog Money Done Right.
Here's who's most at risk for a lower refund this year:
The largest population of people who will be affected by the tax changes are those who did not adjust their W-4, the form that calculates how much income tax is withheld from every paycheck. An estimated 20 percent of taxpayers did not withhold enough throughout the year, says Barry Kleiman, a CPA and principal at the tax firm Untracht Early.
The withholding tables were adjusted to reflect the lower tax rates, he says. But these changes did not take into account other tax law updates such as the reduction in itemized deductions.
End result: "Taxpayers received more in their paychecks but could now see smaller refunds or monies due," Kleiman says.
Higher income earners in states with high state and local taxes could also be affected, says New York-based CPA Anil Melwani.
Workers in New York, New Jersey, Connecticut, Pennsylvania and California, for example, will probably be paying more in income taxes starting with the 2018 tax year, Melwani says. This is due mostly to the new limitations on deducting state, local and real estate taxes.
A good example of this scenario, Allec says, is a married couple with a high income in a big house in a high tax state with three adult children still living at home. Let's say they pay $20,000 in state income taxes annually and pay $15,000 in property taxes. Under the old tax system, they could deduct all $35,000 of their combined state income taxes and property taxes as an itemized deduction.
Now their maximum deduction for these combined taxes is only $10,000, Allec says.
Plus, before they would have received dependency exemptions on their three kids, to the tune of $12,150 for all three. Now they're likely receiving nothing, he says. The Tax Cuts and Jobs Act did away with these exemptions and replaced them with an expanded $500 child tax credit. Unfortunately, this couple can't take advantage of that since their kids are adults.
The third big group of people who may be hit harder, Allec says, are those who have a large number of unreimbursed work expenses: uniforms, equipment, travel and vehicle costs, including mileage, for example.
"In general, folks with significant itemized deductions such as state and local taxes and unreimbursed business expenses will be more susceptible to smaller refunds or monies due," Kleiman says.
Under the old rules, you could deduct employee expenses that exceeded 2 percent of your adjusted gross income, Allec says. So if you're making $50,000, and you incurred $5,000 in unreimbursed employee expenses, you could take a $4,000 deduction for these expenses.
"Such a large amount of unreimbursed employee expenses may sound foreign to those with 9-to-5 office jobs, but there are several professions where paying a significant amount of expenses out of pocket is the rule more than the exception: non-commission-based salespeople who have to wine and dine potential customers on their own dime, for example, as well as long-haul truck drivers," Allec says.
If you are concerned about your tax situation, the best thing to do is to file early and hold off on any big purchases, experts say.
"Taxpayers should file their returns or estimate their tax liability as soon as possible to prepare," Kleiman says. "If money is owed, the balance does not have to be paid until April 15, even if the return is filed earlier."
It's also not a bad idea to consider the worst-case scenario, one in which you have to write an unexpected check to the IRS, Allec says. Take a close look at your budget now to start looking for ways to save money where you can.
"I'm not saying that people necessarily need to alter their entire lifestyle," Allec says. He suggests starting with the easy stuff: dine in more, or rent a movie from the library rather than going out.
If you do end up owing the IRS, don't panic. There are payment plans available if you can't pay your entire tax bill when you file your return. And the IRS has said it may waive penalties if you've paid at least 85 percent of your 2018 tax liability.
Keep in mind that filing an extension will not get you a reprieve. An extension does not extend your time to pay your taxes due, Melwani says. Instead, you'll still have to pay about 90 percent of your tax bill by April 15 to safely avoid penalties.
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