With the new federal tax law in effect, Marty Kurtz, founder of the Planning Center in the Quad-Cities, said everyone should spend time deciphering their tax returns this season.
The Tax Cuts and Jobs Act was passed in 2017, with significant changes to the tax code going into effect for the 2018 tax year. That means you may notice some changes while filing your tax return with the Internal Revenue Service this spring.
"This is the first time in more than 30 years since we've had this big of a change, and people really need to understand their tax return to see what's going on," Kurtz said.
The tax reform law included the general lowering of tax rates, doubling the standard deduction and eliminating the personal tax exemption, to name only a few changes.
But Kurtz said people who are expecting a bigger refund thanks to the federal tax cuts may be surprised when filing their taxes. Because the IRS reduced the withholding rate for federal income taxes, many employees have been receiving more money in their paychecks this past year.
As a result, people hoping to receive a bigger tax refund than in previous years may be disappointed, he said. For some — especially taxpayers with more complex situations — the change could result in a smaller tax refund, or even a balance due.
"We've had clients confused because they think taxes went down and tax rates went down, which they did, but if they didn't withhold enough, it's not going to look like that," Kurtz said. "Payroll deductions of taxes also went down. So people may not have enough paid-in, even though their employer withdrew money every paycheck and sent it on to the federal government."
Employees who didn't pay enough in taxes throughout the year could end up owing money.
"That's the real downside we're seeing right now," he said. "It's fine to have tax reform, but if you don't pay enough in, there could even be a penalty."
Kurtz said as people file taxes this year, they should look back at how much they paid in previous years to begin estimating their 2018 taxes. If a change is necessary, employees can go to their employer, file a new Form W-4 and ask that more money is withheld.
The tax law also lowered withholding rates for pension payments, so retirees may also need to consider filing a new W-4.
Several other sweeping changes to the tax code are now in effect. They include changes to itemized deductions and the tax deduction for charitable contributions. To fully understand how your tax return may differ this year, Kurtz suggests people work with a tax preparer or financial adviser as soon as possible.
"Taxes are such an individual thing, and everybody's circumstances are different," he said. "People get used to dealing with their taxes once a year, but we need to look at it throughout the year — especially if you have more complexity to it. It can be one complicated thing."