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Tax Cuts and Jobs Act (TCJA) And Tax Planning for 2018

Tax Cuts and Jobs Act (TCJA) And Tax Planning for 2018

The Tax Cuts and Jobs Act may have lessened the burden of most middle-income taxpayers because of the low taxes this year, but it may still have a negative impact on your tax planning.

President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law last December which implemented lower tax brackets and almost doubling the standard deduction. This may seem like a good news but taxpayers may have to deal with some complications in their tax planning due to the following provisions that haven’t been made clear by the IRS.

Withholding Changes

More of middle-income taxpayer’s income will be taxed at lower marginal rates because of TJCA and income amounts were expanded to which the new lower rates are applicable. This means taxes that are automatically withheld from working individual’s paychecks will be typically reduced by employers. However, since the new tax code was signed so in late in 2017, it was only until March 2018 that the new withholding tables were put into effect. This means employees may have withheld too much resulting to overpayment of taxes in early 2018 as employers based on the 2017 tables included in the higher tax rates.

The IRS gave taxpayers a chance to calculate how much they should have withheld from their paycheck by releasing an updated Withholding Calculator and Form W-4. These tools are used to update your 2018 tax withholding. Information released where also issued by the agency to remind the public about the paycheck checkup in updating their 2018 tax withholding.

Furthermore, taxpayers who are self-employed, retired, or those who receive their income from investments must have revised estimated tax payments to make sure their payments are accurate and underpayment penalties are avoided.

Limit on State and Local Taxes Deduction

You may want to read into this section as well if you want to have an efficient tax planning for 2018. A limit was imposed on the state and local taxes deduction that will surely cause a substantial impact to most taxpayers. The annual limit was set at $10, 000 on this deduction start 2018 tax year. Although the new law was transparent with the restriction on prepayment of 2018 state income tax in 2017, prepayment on property taxes was slightly blurry.

Most taxpayers practice prepayment on their 2018 property taxes before 2017 closes because aside from qualifying for a higher deduction for 2017, it also helps them avoid the new limit on SALT deductions on 2018. The IRS, however, wasn’t clear whether claiming a deduction for doing this is allowable or not. A statement was then released by the IRS stating that 2018 property taxes could only be repaid in 2017 and deducted if the taxpayer’s local jurisdiction in 2017 assessed the tax.

Deduction for Interest on Home Equity Loans

The deduction for interest on home equity loans is a very useful tax planning strategy but due to the new provision, it may create some confusion for most taxpayers. Although the Tax Cuts and Jobs Act stopped the deduction on home equity loans after January 1st, 2018, the IRS specifies that individuals can still deduct the interest paid on borrowed amounts provided that the funds used are for buying, constructing, or improving the taxpayer’s home.

In addition, the interest on home equity loans deduction is also subject to the overall limit on deductible home loan interest on up to total loans of $750, 000. If your interest on new mortgages and home equity loans goes above the limit, it’s no longer considered deductible.

Bottomline

Now that you’re aware of some of the confusing provisions under the new law passed by Congress and signed by the President of the United States, you now have an idea on the significant change it may cause on your personal tax deductions and the potential it may have on your 2018 tax planning. The best time to also talk to your Accountant regarding the best possible options and effective strategies you can use beneficial to your financial standing. Ask about different ways to cut your taxes under the law such as paying off your home equity loan, bunching your charitable contributions, taking advantage of deductions if you’re a business owner, taking a closer look at your gift and estate planning.

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