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By Mark Saviet
Paychecks should be going up for most employees since the IRS updated withholding tables to account for recent tax reform changes. But take-home pay is just one piece of the financial picture that taxpayers need to understand the impact of tax reform and plan for its many changes. The other major piece of the picture is their tax refund or balance due. There are many variables in the tax reform law that make it difficult for taxpayers to know how everything will come out in the end.
As taxpayers begin to see the impact tax reform has on their paychecks, they can determine how much they’re paying toward their tax bill. For example, if a taxpayer with a semi-monthly paycheck gets $50 more each paycheck because of withholding table changes, they will pay about $1,200 less in taxes throughout the year. But to know whether that is the right change based on their specific circumstances (and their personal preference of refund size), they need to figure out their potential tax liability for 2018.
Taxpayers need the bottom line to avoid surprises
In some cases, the changes to their paychecks might mean taxpayers get a smaller refund in 2019 even though their tax liability has decreased. For example, a single taxpayer with no kids and a $35,000 salary could get a $600 refund this year for his 2017 tax return. Then his semi-monthly paycheck increases $32 in February which means he’s paying around $750 less in taxes throughout the year. When he files his 2018 tax return next year, he would get a $500 refund, $100 less than he received for 2017. Even though his overall tax liability has decreased by roughly $650, he will get a smaller refund than in 2017. If he would like that $650 as a refund rather than in $32 installments over the year, he will need to update his W-4 with his employer to increase his withholding.
On the other hand, some taxpayers might get a much larger refund but they would prefer it in their paychecks. For example, a family of four with a salary of $90,000 got a $780 refund this year. Their semi-monthly paychecks increase $61 in February. Even after paying about $1,400 less in taxes throughout the year, they will get a $2,000 refund in 2019. If they would like that $2,000 during the year, they will need to update their W-4s to decrease their withholding.
There are many different outcomes possible, all dependent on the unique facts and circumstances in the taxpayer’s life. Taxpayers can learn their outcome online using a tax reform impact calculator or in a tax preparation appointment with a free personalized analysis of their tax reform impact from their H&R Block tax professional.
Based on this information, a taxpayer might choose to adjust their employer withholdings by updating their W-4 or change the amount of quarterly estimated tax payments they make.
Tax reform impact analysis sheds light on financial options
The online tax reform impact calculator or the in-office impact analysis can also help taxpayers find the specific ways the tax reform law impacts them so they can determine how to adapt. For example, if they have large unreimbursed employee expenses (such as truck drivers with overnight stays, employees paying union dues and traveling salespeople without mileage reimbursement), which are no longer deductible under the tax reform law, the analysis will show the amount of the tax benefit they claimed in 2017 and that it will zero out in 2018. The taxpayer might consider talking to their employer about options to compensate them considering the loss of that tax benefit.
The analysis can also clarify their specific situation. For example, many taxpayers are concerned about the $10,000 limit on itemizing state and local taxes. The review might show them that even though they may not be able to deduct all their 2018 state and local taxes, they might get a better tax outcome in 2018 than in 2017, due to an increased standard deduction, more favorable tax rates or a larger child tax credit. For example, a family of four in San Diego with $12,000 in state and local taxes would still save almost $3,600 because of the other tax reform changes that impact them more favorably.
To get started with the online tax reform impact calculator, taxpayers just need to walk through three steps on their personal information like filing status and number of dependents, their income and their expenses.
To schedule a tax appointment which includes their own personalized analysis of tax reform’s impact, taxpayers should visit www.hrblock.com.
Mark Saviet is a senior tax analyst for H&R Block, the world’s largest tax services provider. Mark has been providing expert tax advice and preparation support for taxpayers in the Boston area for the past 20 tax seasons.