Early Warning Signs of a Tax Problem
There are many factors that can cause an unfavorable tax swing leaving you with a surprising tax bill in the spring. Here are six warning signs that you might have some unexpected taxes waiting for you.
- You didn’t update your W-4
You may have noticed a change in your tax withholdings earlier this year. These changes are based on withholding tables rolled out by the IRS to employers in early February. Now, according to the U.S. Government Accountability Office (GAO), as many as 30 million taxpayers may not have adequate withholdings for 2018. If you have not already done so, review your withholdings in light of the new tax laws.
- You withdraw funds from an IRA before you’re 59½
Situations arise where you need to dip into your retirement savings to address an immediate need. When this happens, it might have major tax implications. This includes:
- The withdrawal may be subject to a 10 percent early withdrawal penalty.
- The funds withdrawn will be taxed at your highest (marginal) tax rate.
- The additional income may push you to a higher tax bracket or bump you over tax-benefit phaseout thresholds.
- You receive a large raise early in the year
While the raise means more income for you, it also means more taxes due to the IRS. Depending on how much more income, it might be taxed at a higher rate than your income in previous years. The tax brackets are built-in to the IRS withholding tables, but they don’t take your entire situation into account.
- You have a second job
Making some money on the side is a great thing, but can be a major tax problem if you don’t plan properly. In addition to being taxed as ordinary income, it might be subject to self-employment tax of 15.3 percent! Plus, withholding rules start over for each job and do not account for any other income you receive.
- Your child turns 17
One of the biggest tax benefits that come by having dependent children is the Child Tax Credit. In the year your child turns 17, they are no longer eligible for this potential $2,000 credit. What’s more, personal exemptions are suspended for the next few years. So you may not only lose an exemption for this child, you now will not receive a Child Tax Credit.
- Your standard or itemized deduction is lower
While the standard deduction is nearly double to $12,000 ($24,000 for married filing jointly) for 2018, personal exemptions are suspended. In addition, many itemized deductions are either limited or eliminated! This can create a vastly different amount of taxable income versus last year. While tax rates are generally lower, there will be more than one surprised taxpayer that sees an expected tax refund turn into a tax bill.
So what can you do? If any of these situations apply to you, now is the time forecast your income and deductions for the year and estimate your tax liability. If your withholdings are falling short, there is still a little time to update your paycheck allowances for a pay period or two or make an estimated tax payment.