Using the 2018 IRS Tax Calculator, we bring you a helpful guide for understanding the new tax rules.
IRS Tax Calculator and New Tax Rules
1. Forecast Your Taxes
Due to the tax reform, there are significant effects on the tax reports of individuals, businesses, and even tax-exempt entities. From estimated taxes to withholding, going through a preview of your 2018 taxes helps you predict some of the probable changes and issues. To help you with your forecast, financial advisers suggest consulting the experts and using up-to-date tax tools that conform to the new tax laws.
TaxCaster by Turbo Tax Calculator allows you to get a quick estimate of your 2017 refunds and at the same time, your forecast of 2018 taxes. Using the latest tax laws, this tool helps you understand how tax reform affects you or your business. Similarly, IRS 2018 Tax Calculator also provides a helpful way to estimate your taxes based on the new rules.
2. State and Local Income Tax Deductions (SALT)
The Revenue Act of 1913 allows taxpayers to deduct all state and local taxes paid within a taxable year. This allows taxpayers to avoid paying taxes on the same income twice, as well as provides a strong incentive for homeownership with the deduction on property taxes and mortgage interests. Compared to the unlimited deductions on the previous taxable year, with the new tax law, SALT deductions is now limited only up to $10,000.
In line with this change, residents of high-income states such as California, New Jersey, and New York may end up paying thousands more than what they are previously paying. U.S. states started looking for alternatives to avoid seeing huge impacts from this tax reform, which could push taxpayers to move to the lower tax states. Some changes they are considering include replacing state income taxes with an employer-side payroll tax and revised tax credits system for charitable donations.
3. Home Equity Loans
Home Equity Line of Credit or HELOC allows a taxpayer an interest deduction of up to $1 million and $100,000 if the money was used for any other purpose than a primary mortgage. Under the new tax law, the amount became limited only up to $750,000 for new loans made after December 14, 2017. It also eliminates the interest deduction on loans not used for buying, building or improving homes.
4. 529 College Savings Plan
One great advantage of the new tax law includes the allowable use of tax-exempt 529 college savings plan to pay for kindergarten through 12th-grade tuition. This federal tax benefit offers a great tax break for many taxpayers. In addition to the federal tax benefit, most states also offer a full or partial tax deduction or credit from 529 plan contributions.
5. Maximize the Benefits of Donations
Under the new tax law, charitable deductions remain deductible on federal returns. Maximizing your annual donations is one of the ways financial advisers see as an effective strategy in getting tax breaks with the tax reform. A donor-advised fund is one way to do this strategy. You can put a few years worth of donation on this account but can distribute the money within several years.
6. Reexamine Your Withholding
The tax reform also requires taxpayers to fill out a revised W-4 form. Since new withholding tables will take effect, you may end up paying smaller taxes than what you are initially supposed to pay when you don’t update your W-4. This may result in paying penalties and receiving smaller refunds. Another significant change in the new law focuses on the elimination of personal deductions.
Companies such as H&R Block and Liberty Tax Service Inc. share their concern about the effects of the new withholding tables to their clients. Their goal is to have the tax calculators updated as soon as possible to help their clients forecast appropriate figures and to avoid paying additional taxes in April. They also advise their clients to make estimated quarterly payments to avoid incurring future penalties.
7. Retirement Strategy
Whether the tax reform has positive or negative impacts on retirees remains to be seen. If this is the case, retirees can make use of some helpful strategies to lower their tax brackets. For example, instead of using 401(k)s, you can make use of standard IRAs which is withdrawable at the age of 59 1/2 without any penalties.
Unsure of how the IRS Tax Calculator works? Watch this video by IRS Videos to learn how:
The IRS Tax Calculator is a great tool that lets you predict your withholding for 2018. While the changes bring a significant concern to taxpayers, there are some effective strategies to avoid paying more. Keeping yourself updated with the changes in the tax reform greatly helps, so make sure to also do your research.
Have you used an IRS Tax Calculator before? Share your experience with us in the comments section below.