Was the 2018 tax year what you expected?
Like many taxpayers, if you’ve already filed your federal income taxes for 2018, you may be surprised to discover you’re not getting a refund this time. If so, this was almost certainly due to the sweeping tax overhaul made by the 2017 Tax Cut and Jobs Act (TCJA).
Since personal tax rates were lowered by the TCJA, it’s natural to assume you would owe less taxes, not more. But as you may have discovered, this isn’t always the case.
Seeing that the TCJA was promised to offer most people a tax break, understanding why you might owe more taxes in 2018 (rather than less) can be confusing. It is more complex than a blog post can really dive into, but the following questions and answers are designed to shed some light on this situation, so you can start revising your tax strategies for the coming years.
Q: What changed?
A: In addition to lowering personal income tax rates, the TCJA doubled the standard exemption to $12,000, added limits to deductions for state and local taxes (SALT), eliminated personal exemptions, set limits on deductions for home-mortgage interest, among many other changes.
Given all of the changes, you may find that you’re no longer withholding the proper amount of taxes from your paycheck and/or quarterly installments to the IRS. When filing, this can result in either overpaying your taxes (and getting a refund) or underpaying (and owing money).
Q: What does this mean for me?
A: In light of these new changes, you should carefully review your withholding and make adjustments if necessary. To help with this, the IRS published new withholding tables and updated its withholding calculator into which you can input your current tax data to see if you need to make any changes.
Q: How do I change my withholding?
A: If you work as an employee, you change your withholding by making adjustments to your W-4. If you work for yourself, you either increase or decrease your estimated quarterly payments.
A W-4 determines how much income tax is withheld from your pay by your employer. You fill out a W-4 when you start a new job, but you can change it at any time. Specifically, the form asks you for the number of allowances you want to claim based on personal factors, such as being married and/or having children and filing as head of household.
The more allowances you claim, the less federal income tax your employer will withhold, which translates to more money in your paycheck. The fewer allowances you claim, the more federal income tax your employer will withhold, lowering your take-home pay.
It’s important that you withhold the proper amount from your paycheck or make quarterly payments. Don’t withhold enough, and you’ll owe the IRS at the end of the year. Withhold too much, and you might get a big refund, but you’ve basically given the government an interest-free loan for that year. Although for some folks, having the IRS save funds for them is the best alternative!
Q: What if I employ caregivers?
A: Many of our clients are at the point at which some amount of in-home or personal care is necessary. Sometimes, that comes in the form of caregivers hired via an agency, or directly by the family. Often, friends of the family or local neighbors, or church members offer their time to assist. What you pay the caregiver might be tax deductible in some cases.
But, please note this very important fact. If you pay that person for services, then you are also required by IRS rules to withhold taxes and submit that to the IRS on a quarterly basis. The caregivers are actually “family employees” and should be treated correctly, from a wage and tax standpoint. If you use an agency, they will take care of taxes. If you hire them yourself, you will need to make the filings.
If you employ caregivers who are “independent contractors” then you must submit A “1099” form that specifies what you paid them. Remember that the caregivers should be employees, not contractors. But, if they ask you to pay on a 1099 basis, you still need to report and send them the right form. They can use that form to self-report taxes.
Some people do not want the burden of wages and tax reporting. Payment in cash “under the table” is common but presents a number of issues. First of all, it is illegal according to the IRS and the NC Department of Revenue. Secondly, the employee caregiver will not receive workers compensation or insurance, and if s/he has an accident at your home, you may be liable personally for a large settlement. Third, such cash payments cannot be hidden from Medicaid and if you need Medicaid in the future those cash payments may actually create a sanction penalty. So, our advice is that you always pay caregivers W2 wages.
Maximize your tax savings
Adjusting your withholding is just one of many strategies you can use to save on your taxes. As you might guess, the TCJA also changed tax laws that have the potential to affect your estate planning strategies as well. In light of this, when the 2018 tax season wraps up, we’ll be pairing up with one of our trusted local CPAs to bring you support and guidance that you can use to maximize your tax savings in 2019 and beyond. Contact us as your Personal Family Lawyer® to learn more.