This time last year we witnessed a development and implementation of the tax reform known as the Tax Cuts and Jobs Act. The reform has not only impacted the individuals and businesses, but also the IRS that has had to revise and update over 400 tax forms, publications, and instructions. For that reason the IRS recommends to give one more look at your withholdings to avoid any surprises when filing.
The tax reform brought about the following changes:
- Tax rates – most of the tax rates were reduced
- Impact on tax withholding – there have been changes on how taxable income is calculated and it may have impacted your withholding; getting a bigger paycheck every month due to changes in tax law is only good if the withholdings are estimated accurately; you don’t want to get stuck with a tax bill in April
- Potentially simpler filing – standard deductions nearly doubled for all filing categories, which means that many taxpayers will find it more beneficial claiming them rather than itemizing deductions; you can still try itemizing to select best option
Because of the recent changes and updates to tax forms, it may be easier this year to efile. The IRS estimates that over 70% of taxpayers qualify to file for free using Free File. The service is not available at the moment and is set to reopen in January.
What to do in the meantime?
Planning is imperative to your financial health and there is still enough time to minimize your obligations. I read an article about a Bitcoin investor who made a substantial amount of money by being early in the game. Towards the end of 2017, when Bitcoin price was approaching $20,000, the individual wanted to act responsibly and diversify his investment. He sold his position and promptly spread the proceeds among other alt-coins. The sale of his original investment triggered a capital gain tax he had to report. The problem is that alt coins peaked shortly after and began their prolonged decline. When it came to pay taxes, his holdings were worth less than his tax obligations. I don’t know how it ended, but this illustrates the importance of thinking about the consequences of this year’s activities on taxes we will file in April.
We had 11 months of transactions thus far and the window to correct some of them is closing. As Alan Lakein once said: “Planning is bringing the future into the present so that you can do something about it now.”