You Need to Estimate Your 2018 Taxes

Okay, let us face some facts that many of you will say is fake or that I do not know what I am talking about and that is your 2018 Federal Income Taxes. Yes, the government after nearly 30 years passed some tax reform last December that I am sure you are all aware of by now. But what I am about to write is based on my own observations and experiences with this tax bill and the one we had for the last 30 years.

Yes, Congress passed, and the President signed the tax act in December lowering the corporate tax rate, and they said the taxes by about $2,000 for the working American. Then these new tax cuts were first seen in our paycheck for the first part of February. Now I work full time for the Federal government and do financial planning and taxes as a part-time business. So I was wondering back in February how this new found an increase of $50 a paycheck was going to affect my 2018 tax bill, so I calculated my estimated taxes based on that first pay stub with the tax changes reflected on it. And based on what I found was my tax liability for 2018 was going to be that I had to pay an estimated $1,600 plus come tax time.

Working so far according to plan

Okay, my paycheck saw an annual increase of $50 a paycheck for 26 total paychecks meaning I was seeing an extra $1,300 in my overall pay for the year. Great things are working so far according to plan. But wait, I now owe an estimated $1,600 because even the Federal government did not calculate the withholdings properly and I will now owe that $1,600 come tax time. So if the people who enacted the new tax bill cannot calculate what the proper withholding should be I have some serious doubts private companies did any better in this procedure.

Now, these estimated taxes are based on me and my wife’s actual pay stubs and do not include my side business as that is taxed separately. I looked at adjusting our withholdings to get our estimated taxes to a point where we either owed very little or would pay very little. And none of the scenarios worked out in a manner that allowed for this to happen which is why we all fill out W-4 forms to have taxes withheld at proper levels, so we are in the exact situation I just described, basically have no tax liability due come tax season. So since I was not able to adjust the withholdings sufficiently, I decided to make quarterly payments of $400 to the Internal Revenue Service to avoid a $1,600 plus tax liability next year. But why would someone who works on a salary for the Federal government need to make quarterly tax payments? Because the withholding tables are all incorrect and most people are not having an adequate amount of taxes withheld from their paychecks.

Then I compared my 2017 taxes to my estimate of the 2018 taxes, and there was no real discernible difference in the amounts I paid in taxes. Okay, I get it you may not believe my situation, so I will explain another that was of a new client of mine who needed to amend their 2017 taxes. This client is self-employed and is a prime target of the tax cut targets as they are in the working class and should see some of these cuts in their next year’s taxes. Right? Well, you would be wrong here too.

Self-employment taxes

Not accounting for their self-employment taxes which are not affected by the new tax bill we will examine some of the basics of their income tax situation only. And so you can have a fairly complete picture of the process I will provide the key statistics here so you can understand why most people will be either like me and my tax situation or this client of mine.

My client’s Adjusted Gross Income after all expenses were deducted from their net income was a little less than $34,000 for the year. They were able to itemize their return, something that they will not be able to do in 2018 due to the changes in the tax law. After taking their itemized deductions away from their AGI, they had a 2017 actual tax liability owed to the IRS of right at $1,800. Now my professional tax preparation software automatically calculated my client’s estimated 2018 taxes, again ignoring the self-employment aspect of their return, they will owe an estimated $2,100 in 2018. This is an actual tax increase of $300 or a 16.67% tax increase for someone whose AGI is less than $34,000.

Now how in the world does Congress and the President pass this comprehensive tax bill to lower the taxes of corporations and supposedly the working class and we get these results? My taxes are basically the same under the new tax bill and yet my properly filled out W-4 results in my owing the IRS an estimated $1,600 at the end of the year. And my client who has an AGI of less than $34,000 sees a tax increase of over 16%. Something is not quite right here, and I am afraid these two examples will not be the only ones come tax season.
If you want to calculate an estimate for your 2018 taxes, please go to the following link to get access to a great Excel spreadsheet that you can use to estimate your own taxes. If you do not feel comfortable in using this tool feel free to contact me and for a small fee I will be more than happy to work with you to arrive at your estimated 2018 taxes. The link for the spreadsheet is http://bit.ly/2orTOnz.

And as always if you have any questions or comments, I would love to hear from you. Leave any comments or questions here on the site or if you prefer you are more than welcome to email me directly at kirk@kgmeyerpc.com.