The Bottom (Tax) Line for 2018

taxThere are reports all over the news that some taxpayers are disappointed with the size of their federal tax refunds. Since we have a pay as you go tax system, each year we estimate the taxes we are going to owe on our income and either pay estimated taxes or have withheld the appropriate amount of taxes so that when we file our returns, we’ve come close to the tax liability. If we overestimate what will be owed, we get a refund; if we underestimate we get a bill for the remaining taxes due and possibly interest and penalty on the deficiency.

Although withholding tables changed early in 2018 because of the many changes in the tax code from the passage of the Tax Cuts and Jobs Act (TCJA), those new tables couldn’t adjust for many of the new provisions of the law. As a result, the sufficiency of the withholding may have impacted the amount of any refund or balance due. Keep in mind though that a big refund is not the goal. The goal is a lower tax liability. The amount of your refund or tax bill does not reflect the extent of your tax liability, only how closely you’ve estimated it during the year. A big refund, on which you receive no interest, is just a tax-free loan to Uncle Sam.

Because this year it was so hard for taxpayers to estimate how the TCJA would affect them, the IRS is providing some relief to taxpayers who find themselves with an underpayment for 2018. In every other year, to avoid an underpayment penalty, the taxpayer must have paid in at least 90% of the taxes owed for the year OR at least 100% (110% for higher income taxpayers) of the prior year’s liability if the underpayment is $1,000 or more. For the 2018 tax year only, the penalty does not apply if at least 85% of the taxes due were paid through withholding and/or estimated tax payments.

 

Photo by rawpixel on Unsplash

Contact Us

332 Tilton Road
Northfield, NJ 08225
phone: (609)641-4000
email: info@capaldireynolds.com

 
© 2015 Capaldi Reynolds & Pelosi - All Rights Reserved