The Planner's Perspective: 2017 and 2018 Tax Years Are Not Equal

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA

For many Americans taxes are a necessary evil. Something to ‘get done’ and forget about for 12 months. However, the savvy taxpayer knows that filing your tax return is equally as important as understanding what it is telling you. With the 2017 filing season now in the rear-view mirror, it’s best to digest this information while it’s still fresh and while there are still 7 months left in 2018 to make any necessary changes.  Spending some time to review your tax return will provide you with insight into the financial health of your household that is unavailable through any other means. There is a reason that almost all lenders ask for copies of your tax returns as one of the first items in consideration of your creditworthiness and it is because of the treasure trove of information it beholds. While it would take volumes to go through every line of the 1040 and its sub-schedules, right now we’ll keep it simple and focus on one number everyone should understand.

We won’t build up to the big surprise here, and ask you to direct your attention to line 63. This is your total tax for the year and represents a key figure: what you actually paid in tax. Forget your periodic withholding and estimated payments made during the year, this is your tax liability whether you like it or not. Just below this on line 74 is an aggregate of what you paid in as estimated tax during the year (largely comprised of withholding from your W-2, estimated tax payments, certain credits, etc). The difference between these two is shown as either a refund on line 75 or a balance due on line 78, depending if you overpaid or underpaid for the year. This is the only time you will ever be able to ascertain what you truly paid in tax for the year as any payments made during the year are simply an estimate.

If you got a big refund, congratulations, you overpaid and loaned the government (at zero interest!) your hard-earned money that you could have taken home in your paycheck and either spent or saved during the year. If you had a balance due, do you know why? Did you forget an estimate, have a large one-time event that materially altered your income or simply not have enough tax withheld in your paycheck? Either way, if you owed, your balance due may ultimately be increased by an estimated tax penalty (shown on line 79) if you didn’t meet certain criteria for the year.

Looking into 2018, it is not safe to assume that your refund or balance due will be comparable to 2017 because of the changes that became effective at the beginning of this year. For those employed that receive a W-2 or retired and receiving a pension, you may have notice that your monthly paychecks increased in either February or March of this year. This is not because you earned more, but because the updated withholding tables require that less income tax be withheld per dollar earned under the new tax laws than under the old tax laws. This would be great if everyone was going to ultimately pay less tax, but we do not anticipate this will be the case universally. By reducing the amount of tax being withheld during the year, all other things being equal, you will have paid in less estimated tax dollars during the 2018 calendar year than you did during the 2017 calendar year. This may pose a big problem for those banking on a refund or those that had a 2017 balance due.

To add further complexity to the matter, changes in income tax rates, allowable deductions and credits may materially alter your 2018 total tax. Business owners have further planning considerations as the changes in corporate tax rates and the creation of the pass-through deduction for certain entities add yet another layer of complexity moving forward. This means that without some analysis, it cannot be assumed that you’re destined for a refund in 2018 just because you got one in 2017.

Content in this material is for general information only and is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.