There’s no doubt about it: Taxes are confusing. More than half of taxpayers said the filing process is stressful and 57% weren’t confident in their understanding of the tax code, according to a recent TaxSlayer survey via Fox Business.
To further complicate matters, the Tax Cuts and Jobs Act brought about major tax reform in 2017 — and left some Americans scrambling to figure out how new rules and updated regulations would affect their finances.
Lifestyle changes, such as getting married or earning a significant raise, could also lead to a loss of deductions and credits you’ve been entitled to before.
If that happens, it’s important you’re prepared. This three-step guide walks you through what to do if deductions and credits you’ve claimed in the past might be unavailable in the future.
1. Determine what deductions and credits you stand to lose
The sooner you discover you’re no longer eligible for a specific tax deduction or credit, the sooner you can plan for a potentially higher tax bill. That’s why it’s important to know when your tax situation might change.
“There are plenty of life changes that might cause you to lose eligibility for a deduction that you were previously claiming,” explained Joshua Zimmelman, president of Westwood Tax & Consulting. This could include:
- An increase in income: Many deductions, including tax deductions for student loan interest, phase out if your income gets too high.
- A change in filing status: If you update your filing status, your eligibility for certain deductions could change. For example, if you switch from married filing jointly to married filing separately, you’ll be disqualified from certain tax breaks, such as the earned income tax credit.
- A change in the law: “Under the Tax Cuts and Jobs Act, many deductions are eliminated for 2018 and beyond,” Zimmelman said.
For the 2018 tax year, almost everyone will be affected by tax reform. In 2017, for example, taxpayers could deduct $4,050 from taxable income as a personal exemption and for each dependent. Starting in the 2018 tax year, that’s no longer the case; tax reform eliminated the personal exemption and deductions for dependents.
Other deductions have been capped. The SALT deduction, for example, previously allowed all state and local taxes to be deducted from federal taxable income. However, the total deduction is now capped at $10,000 for 2018.
Of course, tax reform made other changes that could lower your tax bill, such as reducing tax rates and nearly doubling the standard deduction. And lifestyle changes could work in your favor, making you eligible for credits and deductions you weren’t able to claim before.
To find out how tax changes could affect you, talk with a financial professional or use an online calculator, such as this one from the New York Times, to estimate your costs or savings.
Online tax software programs, such as TurboTax, also offer tools that can help you to understand the impact of lifestyle changes. For example, you can use the education credits and deductions calculator to see what tax savings you might be eligible for. There’s also the TaxCaster tool to estimate your tax costs based on your current filing situation.
2. Adjust your withholding
If you discover you’re likely to owe more money because you’ve lost credits or deductions, consider adjusting your paycheck’s tax withholding. If you request that more money be taken from each paycheck by your employer and sent to the IRS, you can hopefully avoid a big tax bill when you file your taxes.
Withholding is necessary because we have a pay-as-you-go system. Taxes must be paid as you earn money throughout the year. If you’re self-employed, you should typically send in money during the year in the form of quarterly estimated taxes.
If you work for an employer, however, you submitted a W-4 form when you were hired. This form tells your employer how many allowances you claimed, and your employer uses that to determine how much money to withhold from your paycheck and send to the IRS on your behalf.
The W-4 includes a worksheet to determine the correct number of allowances to claim. Input information about dependents, filing status, and tax credits. Using the worksheet, determine if your personal allowances changed from the prior year and, if so, submit a new W-4 to your employer with the updated information. There’s also an online IRS calculator you can use to calculate withholding.
If you’re self-employed, Form 1040-ES contains the worksheet to estimate quarterly tax payments. Complete this form with updated information to calculate how much you need to pay given your current circumstances.
3. Explore options to reduce your tax bill
If you’ve lost deductions because of tax reform or a change in lifestyle, explore alternative options.
For example, you might have been itemizing deductions before tax reform. But now it might make more sense to switch to the standard deduction instead. Consider whether the standard deduction reduces your taxable income more than itemizing would.
“Under the Tax Cuts and Jobs Act, many deductions are eliminated for 2018, but this is countered for many by the increased standard deduction,” Zimmelman said. “The standard deduction has been nearly doubled, so switching from itemizing your deductions to taking the standard deduction might help.”
Similarly, if you’re losing part of your SALT deduction, you could try to reduce property taxes by appealing your tax assessment.
What you owe in property taxes is determined by the assessed value of your property. According to the National Taxpayers Union, 30% to 60% of properties in the U.S. are over-assessed, which means you might be paying too much tax on your home.
The process of appealing differs by county but could involve submitting a form, providing a professional appraisal of your home or evidence that comparable properties are assessed lower, or attending a hearing.
In some cases, unfortunately, there’s nothing you can do if your taxes go up. If this happens, it’s helpful to know as early as possible, so you can plan ahead.