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Shocked by Your 2018 Tax Bill?

Many people are still in shock after filing their 2018 federal and state income taxes. Because the new federal tax law -- the 2017 Tax Cuts and Jobs Act -- reduced marginal tax rates, many people expected a refund would be coming their way. But for some high-income households, that turned out not be the case.

I had one client who used the phrase she "fell out of her chair" when she got the news from her accountant about how much she owed. Even though she made a good income last year, she just assumed she'd not have to pay as much as in previous years when she filed her tax return.

There are several reasons why people were surprised. First, companies adjusted their payroll systems to deduct less money from paychecks. If this person had around 22% in federal taxes withheld from their paycheck, but due to other family income ended up in the top 37% federal tax bracket, the difference was due by April 15 when they filed their tax return.

Next, with the economy continuing to hum along in a tight job market, many people earned more money in 2018 than in the previous year and may have moved into a higher tax bracket as a result. At the same time, individuals lost some important deductions that significantly lowered their federal tax bill in recent years. People who itemize their deductions are now limited to $10,000 in deductions for state and property taxes, whereas these deductions used to be worth significantly more. For example, if your family income is $400,000 annually and you pay state taxes of $20,000, your deduction for state taxes paid just got cut in half.

Making more money is always a good thing, but it does mean paying some of it to the Internal Revenue Service. For those who experienced the pain of paying more taxes for 2018, what changes can be made this year to reduce taxes owed, and the surprise, for 2019? Here are a few recommendations:

Check in more often with your Certified Public Accountant.

Your tax accountant can run mid-year and end-of-year tax projections to determine if you need to make any adjustments to your payroll tax withholding, quarterly estimated tax payments, or withholding from retirement account withdrawals. They'll need to know how much income you've earned so far such as from your job, your business and investment accounts, plus retirement income for those no longer working.

Your CPA can update your tax estimate accordingly. While it may not lower your tax bill, this will at least reduce the chance of being surprised next April 15.

e chance of being surprised next April 15.

Get More Taken Out of Each Paycheck.

Those who receive a W-2 form can contact their employer and change the amount of tax deducted from each paycheck for the remainder of 2019. For example, a married person can claim "Married, but withhold at higher Single rate" and 0 allowances on their Form W-4 payroll withholding form, which will increase the amount of tax taken out of each paycheck.

Set Aside More from Any Bonus or Stock Award.

Employers often don't withhold enough money from these one-time payments, causing people to underestimate how much they need to pay in taxes. Companies usually take out 22% for federal taxes on bonuses and stock awards, but if you are in the 37% tax bracket, you will owe more.

Adopt a Strategic Approach to Charitable Giving.

For those who didn't get the tax benefit of charitable deduction in 2018, consider setting up a Donor Advised Fund (DAF). A DAF enables a person or couple to essentially prepay their charitable contributions for the next few years by setting aside this money in the DAF now. You can decide how much and to which charities to donate the money to over the coming years, while receiving all of the tax benefit this year.

For example, a married couple filing jointly that normally makes $20,000 in annual charitable contributions can set up a DAF and "lump" their contributions by giving $60,000 in 2019 to be distributed over a three-year period. By combining their $60,000 contribution with a $10,000 deduction for their local and state income taxes, they could deduct $70,000 on 2019's federal income tax returns. In 2020 and 2021, they will take the standard deduction allowed by law, which is currently $24,400.



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