Tax season officially starts on Jan. 28 – the first tax return filing since the largest Federal tax code overhaul in 30 years. With numerous changes, prepare early. The new law is packed with both positive and negative implications, and many folks are still trying to figure out what it all means. Here are a few highlights to expect.
SURPRISE! YOU OWE UNCLE SAM
The average individual taxpayer will enjoy a slight tax cut thanks to tax reform but don’t spend your tax refund just yet. Instead, your refund may be smaller than usual or you may even owe money on April 15. How is this possible? If you received a paycheck last year, remember that bump in your take-home pay? Your Federal withholding decreased as a result of the IRS’ revision to the withholding tables. The revision was meant to reflect the new tax law but the complexities of tax reform may not have been fully considered in the tables. Based on the IRS’ guidelines, your employer adjusted your withholding, boosting your net paycheck. Know that it was an early calculated estimate based on an ambiguous new tax law. So that tax cut? You’ve been enjoying it all year, a little at a time.
MANY QUESTIONS SO START EARLY
There’s still a lot of uncertainty how the new 1,000-page- long tax law will mesh with the tax code. Congress quickly passed the law and gave the IRS a set of statutes full of holes and missing words. The IRS is still trying to figure it out and there are many questions yet to be answered. Expect more regulations to come, but in the meantime, the show must go on. With new tax forms and schedules, preparation will likely take longer. Expect a more challenging tax season, so get to your accountant’s office early or leave yourself plenty of time to prepare your own tax return.
NEW RULES, NEW TAX BREAKS
Forget any preconceived ideas whether you qualify for a particular tax break. It’s a new set of rules. You may find that you are eligible for tax credits that you have not been able to claim before. The child tax credit is one of many examples. The child tax credit offers up to $2,000 per qualifying dependent child under age 17 as well as the new $500 credit for qualifying dependents 17 years or older (including an aging parent who depends on your care). You can take full advantage of the credit if your adjusted gross income is under $400,000 for joint filers and $200,000 for everyone else, subject to phaseout beyond these income limits. If you ignore the new rules, you could miss out on great tax-saving opportunities.
STATE TAX NONCONFORMITY
It’s not surprising that California didn’t conform to many Federal tax breaks. Pay close attention to the differences between Federal and the state laws – California is notorious for nonconformity. A prime example is the 529 College Savings Plan, which is used to save money for education on a tax-advantaged basis. The new law now allows you to withdraw up to $10,000 per student to pay for private K-12 tuition. California sticks to the old law that only allows you to use 529 funds for qualified higher-education expenses. So if you are taking advantage of this new Federal perk, expect California to tax you on the distribution’s earnings portion.
THE BOTTOM LINE
One thing is for sure this tax season: There are winners and losers. If you are filing your own tax return, give yourself plenty of time. If the new law understandably has you confused, hire a knowledgeable tax professional.
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at email@example.com or 661-324-4971.