Many have been waiting to see the impact of the new Tax Cut and Jobs Act (TCJA), and the gauge many are using is their tax refund. This has left many shocked by a significantly smaller refund or (gulp) taxes owed this year. This has led to a level of confusion that can hopefully be cleared up with an explanation of a few pertinent facts.
First, it is important to note the difference between tax refund and tax liability. Tax refunds reflect the difference between withholdings and taxes owed. Tax liability is the taxes owed on your taxable income. To fully compare the impact of TCJA (if there were no significant changes in your taxable income), compare your taxes owed this year to your taxes owed last year.
The second factor is that the updates to the withholding tables (which took place early last year) left many with more take-home pay; however, this also resulted in fewer taxes being withheld. As a result, many were left with less of a refund, or potentially taxes owed.
Many families, especially those with kids, were impacted by the loss of personal exemptions. Personal exemptions helped to decrease your taxable income and therefore your tax liability. To make up the difference, the existing child tax credit was increased to $2,000, and a new dependent care credit of $500 was created for other dependents who were over the age of 16. These new credits lessened the impact of the loss of personal exemptions, but for many, the impact was still significant.
If you ended up with a small refund, then you probably do not need to make any adjustments. If, however, you ended up with a large tax liability, then you should adjust your withholdings at work to have more taxes taken out each pay period. You can check your withholdings using the IRS withholding calculator at IRS.gov.
If you ended up with a larger than expected tax bill, and are considering paying by credit card. Check out this link for some of the pros and cons of paying your taxes with a credit card.
If all of this information leaves you feeling a little overwhelmed and you need assistance filling out your 2019 taxes, book an appointment with ABC Accounting today!