Color of Money: What to do right now to improve your 2019 tax return
WASHINGTON -- Despite claims that it would be simple, the Tax Cuts and Jobs Act has proved to be anything but.
The new law changed the tax rates and brackets, and it increased the standard deduction. But it also removed personal exemptions and limited or discontinued certain deductions. These changes resulted in lower taxes owed for some. But for others, it's meant higher taxes -- and in many cases, it's led to getting an unexpected tax bill this year.
And if you didn't pay Uncle Sam enough during the year, you could be hit with an underpayment penalty.
We have a pay-as-you-go tax system. As a wage earner, this means you pay your federal income tax by having it withheld from your paycheck throughout the year. What you pay is based on the number of allowances you claim on your W-4.
It's up to you to determine how many allowances to take. Allowances are based on your anticipated tax deductions such as mortgage interest, charitable gifts or deductible medical expenses.
When there are changes to your life that could impact your tax situation -- you get married, have a child or purchase a home -- you may need to fill out a new W-4 form.
Because of the tax reform enacted in 2017, many people should have checked their withholdings to make sure they were having enough taken out to cover their tax obligation.
The IRS has tried to get folks to review their withholdings through its "Paycheck Checkup" initiative. The agency issued consumer alerts pointing out that the updated federal tax-withholding tables released in early 2018 didn't fully factor in some changes, such as reduced itemized deductions.
The IRS initially said in January that it would waive the tax penalty for taxpayers who paid at least 85 percent of their total tax liability during the year through federal income-tax withholding, quarterly estimated tax payments or a combination of the two. The usual threshold is 90 percent to avoid a penalty.
Turns out that wasn't enough relief. So last week, the IRS said it would now waive the penalty for people who paid at least 80 percent of what they owed.