The first tax season under the Republican-sponsored overhaul brought an odd combination of pleasant and unpleasant surprises: lower tax burdens, but also lower refunds — and, for some, an unexpected bill.
Anyone who didn’t take a proactive approach after getting a big tax bill last time around could end up in that situation again, only worse: That filer is more likely to have to pay a penalty.
For 2019, taxpayers who didn’t generally withhold at least 90 percent of their liability from their paychecks may be required to pay a fine. That threshold is back up from 80 percent, where it was set last year as everyone adjusted to the new rules.
If a withholding calculator — like the one on the Internal Revenue Service’s website — shows you’re significantly short, you have options. There may be time to have an extra amount withheld from your final paycheck to get you over the threshold, although that will require filling out a W-4 now and another later to reverse that change. Or you can make what’s called an estimated tax payment directly to the I.R.S.
You’ll also want to think about how to handle the rest of the tax balance.
“You can start planning for that now by setting aside money in savings accounts or planning ahead for an installment agreement with the I.R.S. so you can pay over a period of time,” said Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute.
Most households did pay a bit less because of the overhaul: Individuals’ total tax liability dropped nearly 5.8 percent, or $70 billion, according to I.R.S. data on tax returns filed through July.
But it didn’t feel that way for some taxpayers. The number of refunds issued hardly budged — they were down 0.3 percent — but refunds for many were smaller. Refunds for those who earned between $100,000 and $250,000, for example, dropped by about 11 percent, according to the I.R.S.
Many people were surprised to learn that they owed the government money even if their situation hadn’t changed.
Why? After the law went into effect, the government told employers how to tweak the amount of tax withheld from workers’ paychecks. It mostly suggested decreases, and, in some cases, filers didn’t have enough withheld. (Over all, however, the average refund amount declined only 1.3 percent last year.)
“It’s safe to say taxpayers were caught off guard by the impact of those changes,” said Brian Ellenbecker, a certified financial planner and senior vice president at Baird, a financial services firm in Milwaukee.
The new law simplified the tax lives of many households because it doubled the standard deduction. About 90 percent of taxpayers used the standard deduction on their 2018 tax return, the I.R.S. said, up sharply from 70 percent in 2017.
But that doesn’t mean there aren’t some simple strategies to consider to lower your tax bill, and there’s still time left in the year to put them to work.
Bunch your deductions for maximum benefit.
For 2019, the standard deductions are up a little, to $24,400 for married couples filing jointly and $12,200 for single filers. For most people, that will do nicely.
But if your itemized deductions — including mortgage interest, state and local taxes (known as SALT, now capped at $10,000), and charitable contributions — are just shy of topping the standard amount, you might think about bunching certain deductions into alternating years.
Consider a family that gives $5,000 to charity at the end of every year. Instead of making that donation this month, it could do so in January, then make another as usual next December. The family would then have $10,000 in itemized deductions for the 2020 tax year.
The same logic can be applied to certain medical expenses. In 2019, you can deduct the portion of your expenses that exceed 10 percent of your adjusted gross income (if you itemize). So if you plan to have elective surgery, for example, it may make sense to consider the timing.
“Dental bills,” said Larry Pon, a certified public accountant in Redwood City, Calif. “Those are big ones.”
Make donations from your I.R.A.
There’s a way for some older taxpayers to get a break using charitable contributions even if they don’t itemize. Those over 70½ can make what’s known as qualified charitable distributions — a direct donation from an individual retirement account to an eligible charity. The benefits are twofold: Donations, up to $100,000 annually, are not included in their taxable income but count toward the prescribed amount they must take out each year (also known as a required minimum distribution).
“This opportunity was a good deal before tax reform, and now it can be even more relevant and useful,” said Joe Musumeci, a certified public accountant with Rowles & Company in Baltimore.
Save more for retirement.
There aren’t many pay periods left, but workers can reduce their taxable income by contributing more to their employer-sponsored retirement account, such as a 401(k), before the end of the year. Contribution limits to such accounts are $19,000 in 2019, or $25,000 if you’re 50 or older.
And there’s still plenty of time to contribute to I.R.A.s. Contributions to traditional I.R.A.s may also provide a tax deduction, as long as you meet the income limits and other rules. For 2019, contributions to traditional and Roth I.R.A.s can be made until the April 15, 2020, tax deadline. (Just be sure to tell your provider that the contribution is for the 2019 tax year.)
The same goes for self-employed people contributing to a SEP I.R.A., which allows contributions up to 25 percent of compensation up to $56,000 for 2019, said Lisa Greene-Lewis, a certified public accountant at TurboTax.
Save more for college.
If you plan on contributing to a 529 college savings plan, you probably want to do so before Dec. 31.
That’s the deadline to qualify for many of the state tax breaks offered by more than 30 of these plans. (Some states’ deadlines stretch into the new year.) Contributions are made with money that has already been taxed, and it’s withdrawn free of capital gains and income taxes as long as it pays for qualified expenses.
Spend what you’ve already set aside.
It won’t exactly cut your tax bill, but it would be a missed opportunity to not use money you’ve put into a health care flexible spending account or a dependent care account. Be sure to check your balances and put that pretax money to use.
Plan rules vary, but some employers require you to spend F.S.A. money by Dec. 31 or lose it. Others provide more flexible options: a grace period (often until about March 15) to incur any new expenses, or the option to carry $500 into the new year.
Dependent care accounts aren’t as flexible; the money has to be spent by Dec. 31. Still have a balance? Day camps during your child’s holiday break count — just be sure to get a receipt.
Other things you shouldn’t forget.
Taxpayers have been expected to report and pay tax on any gains from the trading of cryptocurrencies, but this year the I.R.S. is planning a direct approach with a new question on your 1040 form: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
Finally, remember to check your withholding — yes, again — early next year. The I.R.S.’s Tax Withholding Estimator will be updated again soon, and that’ll be the time to make sure you’re on track for the 2020 tax year.