By: Jeff Skolnick, CPA, M.S. Taxation

We are now through tax season, in my opinion, this is a good time for everyone to examine their personal tax situation.  While most people saw their Federal income tax liability fall, some saw it rise and others even if they saw a decline in their taxes saw an even greater reduction in their withholding which led to a decreased refund or even a balance due. I will outline some areas that I believe individuals should take a look at in order to avoid surprises next April.

Self-Employment Tax

If you are an individual that is self-employed (sole proprietor or single member LLC) and you are subject to self-employment tax it is important to realize that the rate is approximately 14.1%.  In addition, individuals that own interests in partnerships or LLCs may also be subject to self-employment tax.  If an individual is subject to self-employment tax and does not account for this amount in their estimated tax payments it can be painful in April. I am therefore stressing to all those individuals that are subject to self-employment tax that they make quarterly estimated income tax payments to avoid pain and misery in April.

Additionally self-employed individuals always have a more difficult time estimating their current tax situation then do W-2 employees. Income can vary greatly year to year and you must monitor your individual situation in order to avoid surprises.

Changes in your personal situation

There may be changes in your personal situation that can affect your tax liability.  An example of this might be the child tax credit. There is currently a $2,000 tax credit for children under the age of 17.  Under the new law, many more people were able to take this credit based on more liberal income limitations. If you have a child that will reach age of 17 during the year the credit that you enjoyed this past tax season will not be available for you next April.  It is very likely that you will still have a $500 credit, but you will not have a $2,000 credit. I also want to mention the income limitation on this credit although it is not nearly as important as it once was.  Prior to the Tax Cuts and Jobs Act child care credits started to phaseout at $110,000 of Adjusted Gross Income for married couples filing jointly, $55,000 for married couples filing separately and $75,000 for everyone else. Under the new law the credit starts to phaseout for married couples filing jointly at $400,000 and $200,000 for all others.

Medical expenses are not deductible unless they exceed 10% of your income for tax years after 2018.

Most married couples filing jointly did not itemize and used the $24,000 standard deduction.  This should be kept in mind as such things as charitable contributions, mortgage interest and real estate taxes may not impact your tax return as much as they did in the past.

In many instances individuals that have children in college are entitled to education credits either through the American Opportunity Credit or the Lifetime Learning credit.  Both of these credits, however, have income limitations and therefore a credit you are counting on now may not be available to you.  In some instances, it may make sense for a parent to not claim the child as a deduction and allow the child to claim the credit.  While this may raise the tax liability on the parents, the overall taxes on the family may be lower.  Additionally, the American Opportunity Credit is only available for the first 4 years of college and has a significantly higher income phaseout then the Lifetime learning Credit. Taxpayers should be alert as to how many years they have taken the American Opportunity credit and should plan for a potential reduced or completely phased out credit if they have already used the credit for 4 years.

Taxpayers should of course be reviewing their investment activity as well.  If a taxpayer has any capital gains, they may want to start to look at stocks that are not doing as well that could be sold at a loss to offset the gains. This strategy is typically performed closer to yearend, but taxpayers should monitor their capital gains and losses during the year to allow enough time to plan to offset some of these gains.

If you were subject to the Alternative Minimum Tax (AMT) this past year, it is a good idea to take a look at your estimated  income and deductions to see if this tax will apply, although far fewer individuals are subject to this tax now with the passage of the new law.

Lastly, it is always important to remember that if you have any significant income not subject to withholding (income from a sole proprietorship or single member LLC, income from a partnership, multiple Member LLC, S corporation, trust, or investment income such as interest, dividends or capital gains), then you will either have to increase the withholding on income that is subject to withholding or make quarterly estimated income tax payments.

Conclusion

If you found this year that your withholding was not sufficient to cover your liability you may have to increase your deductions or make quarterly estimated income tax payments in order to avoid being underpaid on your tax liability at yearend. You have over 8 months before yearend and almost a year before April 15th to remedy the situation which is much better than finding out a few weeks before your return is due.  Once again if you’re not sure, then check with a tax professional to help determine your tax position.