As we begin to enter the middle of tax season, it is becoming pretty apparent that a lot of taxpayers are beginning to see the effects of the new tax law as they file their tax returns.
It has been widely reported that the average refund for taxpayers has decreased. The IRS has reported a 8% reduction in average refunds in comparison to 2017. What that also means is that a larger number of taxpayers who may have previously had refunds, now find themselves having to write the Department of Treasury a check before April 15th.
The questions many taxpayers have is how did this happen, what if I can't pay my tax bill, and what should I do to fix this for next year?
First, Why did this happen? What many individuals will find as they review their tax returns is that they may no longer be itemizing their deductions as the standard deduction doubled for 2018 and the state and local tax deduction was capped at $10,000. It is estimated that almost 90% of taxpayers will take the standard deduction going forward rather than itemizing.
The second reason you may owe is that the IRS changed the federal tax withholding tables with the new tax law. The withholding tables are guidelines that your employer follows in order to deduct the appropriate amount of income taxes from your paycheck. The new tables reduced the anticipated tax rate for most individuals. Therefore, even though your taxes for the year may have stayed the same or gone down, with less withheld from your paycheck, you now owe at the end of the year.
What if you can't pay the tax you ower? The IRS does allow for installment plans if you contact them and enter into an agreement that would allow you to pay off your debt over a period of time. If you avoid working with the IRS to pay off your taxes, you may find the IRS issuing a lien on you or worse, levying your assets. It is best to try and avoid these situations as penalties and interest begin to accumulate on outstanding tax liabilities making these debts even more difficult to manage in the long run.
Even if you can't pay your tax, be sure to file your return on time! Filing a return late without an extension will result in much larger penalties when a tax balance is due.
Even if you can't pay your tax, be sure to file your return on time! Filing a return late without an extension will result in much larger penalties when a tax balance is due.
So, What should you do going forward? If you find yourself owing taxes, discuss the reasons why with your tax preparer. By reviewing your tax return and discussing what your income will likely be in 2019, you can then adjust your withholdings with your employer. This might be reducing the exemptions you are currently claiming on your W-4 or simply adding an additional amount to your withholding each pay period.
As always, major life events such as having a child, getting married or divorced may warrant a closer look at your tax withholding as well.
Hopefully, with some planning, you won't be shocked again when you file your 2019 taxes next year.
If you have questions regarding tax or estate planning, please feel free to contact Glick and Trostin, LLC at 312-346-8258.
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