Now is a good time for a tax checkup

Tax Reform provides a new reason for a mid-year review. This could be as beneficial for your tax liability health as a physical exam is for your own well-being.  If you missed this year’s six-month mark, you still have time to see a tax doctor (a financial advisor or tax specialist), but we’d advise sooner than later.

Many people enjoy getting any type of refund back from the U.S. government; however, that means the government gets the benefit of your money throughout the year while you receive no return until the refund check arrives. That’s bad strategy even if used as an involuntary savings plan. As interest rates continue to rise we’re talking about real money: In 2018 there were 67,599,000 tax refunds totaling nearly $200 billion.

IRS Form W-4 is filled out to direct employers on how much federal income tax to withhold from an employee’s pay. For each allowance you claim, more money is withheld from your check. Reviewing Form W-4 annually is worthwhile to keep current on your financial data. An employee’s tax liability can increase whether or not they get a raise. Typically this results from outside income; for example, an employee may have a second job, their own company, real estate or other investments that increase their income. This wouldn’t show up on the primary employer’s W-4. Form W-4 comes into play as well in two areas that are among the most life-affecting:  marriage and divorce, because each has tax implications.

Filing jointly helps married couples reduce their overall tax liability however, in situations where the spouse makes more than the other, the tax is calculated at the higher tax bracket, but withholding applies to the lower bracket so enough tax may not be withheld. A divorced taxpayer is a single taxpayer, which means the probability of greater tax liability even if your income goes down. Failing to adjust W-4 withholding in keeping with the new marital situation may result in a tax shock.

In what is certainly an issue for some from now through the end of the year, alimony payments are tax-deductible while alimony collections are classified as income. This is true only for all divorce and legal separations that occur before Dec. 31, 2018. After that date the tax deduction for alimony payments is eliminated and alimony payments are taxable to the person making the payments.

Job changes come with potential tax consequences, such as those surrounding IRA rollovers. “Rolling over” an IRA brings with it a 20 percent tax withholding if the money is paid directly to you. If you’re under 55 you’ll face a 10 percent penalty if you fail to participate within 60 days in your new employer’s 401(k) or other eligible plan.

For small business owners, you may benefit by making quarterly estimated tax payments instead of paying tax through withholding. Not only will you be able to defer the payment of the tax, you may be able to increase the new 20 percent deduction for small businesses which is permanent tax savings.

Other subjects on the table for up-close mid-year inspection are taxable investments; pre-retirement planning and fund disbursement; education costs and tax breaks around children heading off to college; analysis of your debt-vs.-income status; and setting objectives through the end of the year and into 2019.

Keep in mind, penalties still apply if the tax paid throughout the year is less than 90 percent of the final tax bill. The current penalty amount is 4 percent of the amount underpaid.

Just as you would go to a physician for a physical check-up, it’s wise to consult now with a tax advisor for the financial exam; they can help walk you through the sometimes-chaotic world of the tax code to help put you in the best short and long-term positions. After all, it’s your money, and your life.

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This article was originally posted in the Knoxville News Sentinel. 

Tagged #JimmyTalk, Taxes, Tax Cuts and Jobs Act