The Tax Cuts & Jobs Act was touted as the taxpayer’s miracle of the 2018. After all, the name of the bill opens with the phrase “Tax Cuts”, so one logically would assume that most taxpayers would see larger, or at least steady, tax refunds in 2019, following the first year of filing under the new law.

One thing every taxpayer — individuals and business owners alike — needs to keep in mind is that the size of your tax refund is not the same as the size of your tax liability. Nonetheless, for a great deal of Americans, tax refunds are an essential (and expected) payback after each year’s filing deadline.

Many of the earliest filers are also those most likely to be relying on a hefty refund. And of those, a significant percentage are discovering shock or disappointment at how the new tax law is impacting them.

One major factor in the change is that the IRS adjusted withholding tables a year ago, and if taxpayers did not update their withholding they could end up going from receiving a refund to actually owing money.

Some of the key factors include three significant changes that may impact a lot of small business owners and solopreneurs as well as those who participate in the ‘gig’ economy:

• Unreimbursed Employee Business Expenses – If you’re an employee who pays out-of-pocket for costs related to your job (such as travel and mileage, union dues, job education, work meals, etc.), the ability to deduct these as unreimbursed expenses has been eliminated. That’s a serious hit for those who have long covered some of their own work-related costs on the understanding that they will be able to deduct the costs on their federal taxes. For an entrepreneur, the solution is either to have the business cover these expenses directly or for the business to reimburse the employee under an ‘accountable plan’ which provides sufficient transparency to meet IRS requirements.
• Cap on the Student Loan Interest Deduction – Although the original full removal of the student loan interest deduction was eventually eliminated from the Tax Cuts & Jobs Act, the deduction is limited to $2,500 as of the 2018 tax year. That may cause heartburn for those who are carrying a significant amount of student loan debt (which, today, is a record number of taxpayers).
• Cap on State and Local Tax (SALT) Deductions – Pouring a lot more ‘salt’ on the wound for taxpayers in states with high state and local taxes is perhaps the most jarring shift in the new law (at least in the Northeast), which is the $10,000 annual cap for deducting all state and local taxes (including income, property and sales taxes) from your federal taxes. This used to be an unlimited deduction, and in states such as New York, New Jersey, Connecticut and Maryland with relatively high combined tax burdens, this cap could radically impact a taxpayer’s outcome in 2019.

These are just three of the provisions under the new law that have the potential to reduce or eliminate your tax refund this year, or possibly turn that refund into a bill for taxes owed. Don’t be surprised if these changes impact you, but do talk with your BradyRenner CPA about how best to manage your finances and tax planning under the new law.

Image Credit: frankieleon (Flickr @ Creative Commons)