Have you switched jobs in the past year? Did you start a business? Do you own interest in a pass-through entity? These are all scenarios that you should consider when making your 3rd and 4th quarter tax estimates. In addition to these individual specific situations taxpayers also need to consider the 2017 Tax Cuts and Jobs Act. This legislation drastically overhauled the tax code for the first time in decades. Many of the changes will directly impact your tax situation for 2018.
Some of the highlights include:
1. New income tax rates and brackets
2. Standard deduction increased
3. Personal exemptions suspended
4. Child tax credit increased
5. State and local (Sch A) deduction limited
6. Miscellaneous itemized deductions suspended
7. Domestic production activities deduction repealed
8. New deduction for pass-through income
When you combine the individual specific changes and the tax law changes there’s a lot of room for adjustments.
The typical tests that are applied when looking at estimated taxes (and underpayment penalties) are exception 1 and 2. Exception 1 states you need to have 100% of your prior year tax paid in through either withholding or timely estimates. If your AGI in the prior year was greater than $150,000 then you need 110% of your prior year tax paid in. Exception 2 states you need 90% of your current year tax paid in through either withholding or timely estimates. If you’re currently paying quarterly estimates it may be worth reviewing since the above mentioned items can both increase and decrease your overall taxes. Contact Holbrook & Manter today for assistance with this matter. We would be happy to assist you.