At the end of 2017, President Trump signed into law the Tax Cuts and Jobs Act, also known as TCJA. Widely touted as a tax cut for the middle class, many of the new tax laws are only in effect for tax years 2018 through 2026.
Some of the changes include nearly doubling the standard deductions for singles from $6,350 to $12,000 and $24,000 for married households filing jointly, increased from $12,700. Other changes include eliminating personal exemptions and lowering income tax rates or brackets. Some people who might be expecting a larger tax refund due to these changes may be disappointed because payroll income tax withholding rates were adjusted in February, resulting in less money being sent to the IRS. In other words, the tax law changes were implemented early in the tax year, increasing the net pay for many W-2 employees early in the tax year.
In June, the IRS unveiled what is referred to as the “postcard” tax return, another element of the TCJA that provides the illusion of a simplified tax return. With just 23 lines and measuring 5-1/2 by 8-1/2 inches, this two-sided document appears to have just one-third of the data previously collected on the 79 lines of the 2017 Form 1040 that took up both sides of a standard 8-1/2-by-11-inch piece of paper.
While at first blush this two-third reduction of the number of lines and implied simplicity of filing appears intriguing and makes annual tax filing an easy process, such is not the case. Many of the previous schedules will still be used: Schedule A for Itemized Deductions; Schedule C for Business Profit and Loss; Schedule D for Capital Gains and Losses; Schedule SE–Self-Employment Taxes; Schedule F–Profit and Loss from Farming; and Schedule E–Supplemental Income and Loss.
In addition to the postcard Form 1040, six additional schedules have been proposed and draft versions are available for review on the IRS website, at www.irs.gov. Each of these new schedules contains line details that match or are similar to sections from the old Form 1040. The old 1040 form sections included: Income, Adjusted Gross Income, Tax and Credits, Other Taxes, Payments and Refund. The new schedules that accompany the postcard 1040 are: Schedule 1–Additional Income and Adjustments to Income; Schedule 2–Tax; Schedule 3–Non-Refundable Credits; Schedule 4–Other Taxes; Schedule 5–Other Payments and Refundable Credits; and Schedule 6-Foreign Address and Third-Party Designee.
The simplification of the tax return appears to have created increased complexity with the development of these various new schedules. Tax software developers have had about a year to reconfigure their programs to accommodate all these changes. If you use tax preparation software, chances are your tax return results will be more accurate than if you try to complete the return and associated schedules manually. Even through the filing season, software companies issue program updates as bugs or problems in their calculations are identified. As with anything else, change takes time to adjust to and so it will be with the TCJA.
The IRS has issued publication 5307 Tax Reform Basics for Individuals and Families, which is available in PDF form on the irs.gov website. This 14-page document neatly summarizes many of the changes in the tax law that are important for individual taxpayers to understand. By understanding how tax law applies to your situation, you can pay just what you owe, rather than owing a large sum or getting a large refund at the end of the year.
The IRS website has a calculator that allows you to input your information and determine the correct withholding amount. This handy tool is available on the IRS website and is useful in completing a W-4 withholding form for you to file with your employer to assure the correct amount of taxes is being withheld. This form will retain its current look for 2019, but changes are planned for 2020.
Many employees file a W-4 when they are hired and fail to update this form. Completing a new W-4 annually, and more frequently if your situation changes, assures that you are only paying the taxes that you owe. Just as you wouldn’t overpay when making a store purchase, overpaying your income taxes in order to get a refund doesn’t make good financial sense.
Take steps today to adjust your withholding, if necessary, or estimated quarterly payments if you are self-employed, and learn more about how the TCJA will affect your finances in the upcoming years.