Trusts, Estates and Succession

Due to the TCJA or recent tax reform, in addition to nearly doubling standard deductions, several itemized deductions that can be claimed on Schedule A, Itemized Deductions have changed.

Many individuals who formerly itemized may now find it more beneficial to take the standard deduction.

Here are some of the changes to Schedule A for 2018:

Deduction for state and local income, sales and property taxes modified
A deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 or $5,000 if married filing separately. Anything above this amount is not deductible.

Deduction for home equity interest modified
Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build or substantially improve a main home or second home. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

Limit for charitable contributions limited on the deduction for charitable contributions of cash has increased from 50 percent to 60 percent of a taxpayer’s adjusted gross income. This means that some taxpayers who make large donations to charity may be able to deduct more of what they give this year.

Deduction for casualty and theft losses modified to only include federally declared disasters.

Miscellaneous itemized deductions exceeding 2 percent of adjusted gross income are no longer deductible.
This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. It also includes deductions for tax preparation fees and investment expenses, such as investment management fees, safe deposit box fees and investment expenses from pass-through entities.

If you have itemized deductions in the past, you many see a change on your 2018 return.  This can have a huge impact on your overall taxable income and you may not benefit from itemizing deductions as you had in the past.

You have worked hard and have now retired.  You receive pension and/or annuity benefits, have taxes withheld and all is well when you file your income taxes.  True – well, maybe in the past, but perhaps not in the future due to changes to income tax by way of the Tax Cuts and Jobs Act of 2017.

For retirees who receive a monthly pension or annuity check, this may mean changing the amount of federal income tax they have withheld. The easiest way to do that is to use the Withholding Calculator available on the IRS website – www.irs.gov.  This calculator can help you determine if you have had sufficient withholdings from your pension or annuity or IRA.

When using the Calculator, if the taxes are different from the amount being withheld, a new withholding form should be submitted to the payer.  Pension recipients can make a withholding change by filling out Form W-4P, available on IRS.gov, and giving it to their payer.

Because of the limited amount of time left in 2018, some retirees may be unable to adequately cover their expected tax liability through withholding. In that case, another option is to make a quarterly estimated or additional tax payment directly to the IRS.

If you have not yet received your required minimum distribution for 2018, you can still adjust the amount withheld and avoid penalty.

The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments.

Whether or not retirees receive a pension, there’s another option, available to most of them, for paying their income tax liability during the year. They can ask the Social Security Administration to withhold tax on their Social Security benefits. Unlike wages and pensions, withholding on Social Security benefits and other government payments is voluntary and not based on withholding allowances. Instead, beneficiaries can choose to have income tax withheld at one of four flat rates — 7 percent, 10 percent, 12 percent or 22 percent. To request voluntary withholding and for more information, get Form W-4V, available on IRS.gov.

So, as much as we grumble and grouse about paying taxes, imagine how you would feel if you received a notice from the IRS that you were assessed a penalty for underpayment of taxes.

If we are employed as W-2 employees, taxes are routinely withheld from paychecks.  But, that only takes into consideration taxes on your wages, not on additional sources of income such as self-employed earnings or other income, such as interest, dividends, self-employment, capital gains, prizes and awards.

The IRS has launched its Paycheck Checkup campaign to encourage people to check their tax situation, including withholding and estimated tax payments.  This helps taxpayers to determine if they are having enough taxes withheld from their wages.  Some of the highlighted situations that can be affected by the new laws will impact two-income families, if the child tax credit is claimed, if there are dependents age 17 or older, if deductions were itemized in 2017, if there is a high amount of income or the return is complex and if there was a large refund or tax bill for 2017.

Our tax system is one that calculates tax on income as it is received.  For people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits, tax can be withheld.  And, the amount of taxes withheld can be set by the taxpayers.  If taxpayers do not have sufficient taxes withheld, they can make estimated quarterly payments to avoid penalties.

Why is the IRS suggesting taxpayers look at their withholdings?  Well, The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. And, contrary to popular belief, the IRS doesn’t like to assess the penalties to innocent taxpayers.

A tool available on the IRS website – www.irs.gov – called the Withholding Calculator will help taxpayers eliminate or at least reduce any surprises in early 2019 when filing their taxes.  If you find that you have not had sufficient taxes withheld, supply your payroll department with a new Form W-4 to adjust the withholdings.  If you feel it necessary to make an estimated payment, there are guidelines on the IRS website to assist in that regard.

Don’t be surprised in early 2019.  Take action to have the comfort of knowing you have a sufficient credit for taxes paid.

Like most working Americans, when we start a new job, we complete a Form W-4 to direct our payroll withholdings for federal income taxes.  Unless we have a life-changing event such as marriage or children, we don’t give it another thought about our withholdings.  We become complacent with whatever the bottom line is on our income tax returns and life goes on.

However, with the recent enactment of the Tax Cuts and Jobs Act earlier this year, we need to be proactive rather than complacent (and ultimately reactive in early 2019) about our withholdings and what our bottom line will look like for 2018.  The refund you are accustomed to receiving may not be there for 2018.

Some changes to keep in mind:

• No longer are there personal exemptions, rather there is a larger standard deduction based upon filing status.
• There is a cap on the deduction for state and local property, income and/or sales tax if you itemize deductions.
• Certain deductions such as tax preparation expenses unreimbursed business expenses and moving expenses have been eliminated.
• Deduction of interest on home equity loans has been repealed.
• Alimony payments have been affected.

To ensure that you are not faced with an unexpected tax bill, the IRS has provided a calculator on their website (www.irs.gov) called “Paycheck Checkup” which is available to taxpayers to estimate whether adequate withholding amounts are in place.

Don’t be surprised – do a Paycheck Checkup today.