The Tax Cuts and Jobs Act probably made your tax bill look a little different this year. But if you ended up owing a lot more than you were expecting, you’re not alone. Changes in deductions and tax credits had a massive impact on some taxpayers. If you are one of them, there are steps you can take to keep the same thing from happening next year.
Why Did I Receive a High Tax Bill?
There are a few main reasons your tax bill might be steeper this year than you were expecting.
The main one is likely to be the changes made to standardized vs. itemized deductions. Deductions for state and local income and property deductions are now capped at $10,000. If you paid high state income taxes, like in Massachusetts, then that deduction was capped at $10,000. If you earn $250,000 and above, this is a big loss because you were previously able to deduct large portions of your income tax.
However, the standard deduction doubled – up to $12,000 for individuals and $24,000 for married taxpayers. That’s compared to $6,350 and $12,700 respectively, before the tax changes. So anyone with itemized deductions below that amount are likely to go for the standard deduction.
But taxpayers used to hefty itemized deductions will be taking a big hit, which will show up on their tax bills this year.
How Can I Avoid a High Tax Bill Next Year?
If you are one of the taxpayers with a higher bill than expected, you can do a few things to avoid that next year:
- Pay attention to deductions. You might be used to itemizing your deductions, but with the $10,000 cap for some of the main deductions, it could make more sense to go with the standard deduction.
- Check on your tax bracket. There is a large discount available for those who can get their taxable incomes below $315k. If you can get it below that threshold, the reduction is 8%.
- Increase withholdings. If you owe the government money at tax time, it means you did not pay enough out of your paychecks. Adjust your withholdings so you pay more, and you will have a lower tax bill next spring.
Note that your withholdings might have changed as well. Many people started getting more in their net payments early in 2018, around February. That means that they were withholding less and might not have even realized it. This is especially if your pay tends to fluctuate. If you are withholding less, even though you the tax rates were reduced, you might have ended up with a large underpayment.
- Think ahead when you donate. Many taxpayers who donate money throughout the year itemize those donations. But because the standard deduction has changed, you might not get the same tax breaks as you did in previous years. Try making your contribution every other year and double up on your donations when you do make them. That way, if they’re higher than the standard deduction limit, you’ll be able to itemize.
Regardless of what your tax bill ends up being this year, there are ways to save yourself some money next year. See my posts on decreasing your tax bill, and how the tax law could affect physicians and New Hampshire residents.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.