How Much Tax Will You Owe Next Year?
The Tax Cuts and Jobs Act of 2017, with its lower tax rates and higher deductions, has put extra money in worker’s paychecks in 2018. And many taxpayers may realize when they do their taxes next season that they are eligible for even more tax breaks. There is no reason to wait until you get your refund by leaving it in the government’s hands. Now is the time to calculate your withholding under the new law and adjust your W-4, the IRS says.
The doubling of the child-tax credit for dependents under age 17 adds more to your take home pay now.
If you’re itemizing, you may have withheld a lot from your pay check in the past, counting on your write-offs to justify those withholdings. This is especially true for Clergy. With the elimination of numerous tax deductions, it may no longer be beneficial to itemize for 2018. The standard deduction for a couple filing jointly is now $24,000. The $24,000 may offset the pain from those lost itemized deductions.
To get a handle on what you may owe at tax time, visit a professional or use the IRS’s new Withholding Calculator at IRS Withholding Calculator 2018. To get an accurate amount have a copy of last year’s tax return, get copies of this year’s pay stubs for all your jobs and your spouse, so you can determine how much federal income tax has been withheld so far this year. You can use the calculator if you are retired and getting money from a pension. The calculator will recommend the number of allowances you can claim. If the number is different from what you’re claiming now, fill out a new W-4 form and give it to your employer. Claiming more allowances reduces the amount of tax taken out. Pension recipients can make a withholding change by filling out IRS Form W-4P and giving it to the entity that pays their pension.
The Tax Calculator doesn’t work for everyone. If you expect to owe self-employment tax, tax on unearned income of dependents, or certain other taxes, or if you expect to have long-term or short term capital gains or qualified dividends – use the instructions in Publication 505, Tax Withholding and Estimated Tax or visit a professional. Under withholding not only could lead to a big tax bill next year; it could trigger a penalty. The IRS says you don’t owe the penalty, if you pay 100% of what you owe for 2017 or 90% of what you owe for 2018.
If you’ve itemized in the past, a number of deductions are now gone. Write-offs for unreimbursed employee expenses such as travel and entertainment are now disallowed. If you are used to writing off unreimbursed business expenses, talk to your employer about making adjustments that are more tax-friendly to you.
Lower tax rates for 2018 make contributing to tax-friendly employee benefits like flexible spending plans and traditional 401(k)s a little less attractive. When signing up for employee benefits, it is still important to contribute as much as you can to get your full employer match on your 401(k).
Taxpayers on the borderline between itemizing and taking the new standard deduction could “bunch” allowable deductions into alternate years. An example of this would be where a homeowner could pay their 2019 Property tax in December of 2018 and double up on charitable giving. The move might move their itemized deductions above the standard for 2018. Next year this owner would do the opposite and take the standard deduction and then repeat the 2018 procedure again in 2020. To make this work you need to remember that charitable giving is still fully deductible and that in some places homeowners can prepay property taxes. This is not for everyone – only those with enough cash-flow to make bigger payments early.
Another time honored, tax wise move is what we offer here at the Virginia United Methodist Foundation. It is a smart tax move to donate tax appreciated stock directly to a church and then take the itemized deduction for the appreciated amount. You avoid paying capital gains and here at the Foundation we have a system in place to sell your stock and return to your church the entire amount without paying a brokerage fee. This stock amount can be given to your church and it may put you into a position to itemize when before the deduction might have been relegated to the $24,000 standard deduction.
Our Foundation also offers a Donor-Advised Fund. This fund has no fees and can be set up for a minimum of $10,000, all of which is deductible in 2018! You can pay church pledge amounts for 2018 and maybe pay ahead for 2019 and even leave some in the account to be paid later. Some of this fund can go to colleges or other 501(c)3’s but we require that at least 50% of it be given to a Virginia United Methodist Church or Institution.
A third way our Foundation can help, if you are 70 ½ or older, is to use all or a portion of your required minimum distribution from an IRA or other retirement account to donate directly to your church or a special mission program of your church. Even if you don’t itemize anymore due to the higher standard deduction, making a charitable donation directly to a qualified charity can save you money because your overall taxable income will be lower.
We hope these tax hints will be helpful. If you would like us to come and share this and other information at your church or District, please give us a call at 804-521-1121. Ted Soto, Randy Shelton or Tommy Herndon stand ready to give you a hand.
