Two Things You Should Do This Year To Save Money on Taxes

SMITH BRAIN TRUST – It’s probably never too soon to start thinking about tax season. Particularly this year, says Maryland Smith’s Samuel Handwerger.

The Tax Cuts and Jobs Act, which passed last year, made a lot of changes to the individual returns and the subsequent tax computation. It’s worth thinking about how those changes will affect your returns, before the year is over, Handwerger says.

The law lowered some tax rates and raised standard deductions. It also limited itemized deductions, capping state income and real-estate tax deductions at $10,000 and doing away with the miscellaneous category altogether. It erased personal exemptions and expanded child credits.

According to the Tax Policy Center, 92 percent of Americans are expected to be tax neutral or have a lower tax liability in 2018, compared to the year before. But don’t get too excited, Handwerger cautions.

“The prediction is that when it comes time to send in your 2018 returns in April of next year, more Americans than usual will owe money on their taxes, with perhaps more than one-third of all returns showing a balance due,” he says. 

That’s compared to an average that usually sits below 25 percent.

“It’s an ironic twist,” says Handwerger, a lecturer in the accounting and information assurance department at the University of Maryland's Robert H. Smith School of Business. It stems from changes made earlier this year to the Internal Revenue Service’s withholding tax tables. The tables lowered withholding, to comply with the lower rates and higher standard deduction set forth by the new tax law, but did not compensate for those who will still itemize in 2018, generally higher income earners. “They’ll be the big losers in the curtailment of itemized deductions,” he says.

Also at risk, he says, are people whose taxes are not automatically withheld. For example, people on social security or receiving other types of retirement income. Even if those people have taxes withheld from their payments, the withholding tables now are different and it’s likely that too little is being withheld, he says.

“Owing taxes when sending in your return is not pleasant, but the bigger problem is that you may be subject to an under-withholding penalty,” he says. In other words, you’ll owe interest.

To avoid paying interest and penalties to the IRS next year, Handwerger recommends these steps:

1. Estimate the shortfall in taxes paid and send the money to the IRS now or by January 15, the scheduled time for the final 2018 quarterly installment. This will at least avoid further interest charge on any shortfall.

2. Increase your withholding at work between now and your final 2018 paycheck such that the increase makes up for shortfall.

“The good news about taking the second option, if you can, and increasing your withholding taxes is that the IRS counts those as having been paid evenly throughout the year,” Handwerger says. “So any corrective action taken through withholding will wipe out the interest for under withholding for the whole year. Not so with estimated payments, which are only credited to the date you actually pay.”

Not sure how much money you will need to withhold? No worries, says Handwerger. “For less-complicated situations the IRS has a handy-dandy withholding calculator on its website,” he says. “More-complicated earners should seek advice from their tax consultant.”

“Either way,” he adds, “the exercise may be well worth it.”