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Every tax season the Internal Revenue Service (IRS) processes millions of tax returns and distributes billions of dollars in tax refunds. But if you’re counting on a large tax refund this year, you may want to rethink that tactic. The Tax Cuts and Jobs Act (TCJA) of 2017 may have affected your take-home pay for 2018. It also may have impacted the size of your refund — if you get any at all. So, it may be time to rethink your savings strategy. Here’s how:
As the first major tax reform since 1986, the TCJA of 2017 may lower or increase your tax refund. That’s because the law removed some key deductions and personal exemptions. For example, you can no longer lower your tax liability with personal exemptions. Neither can you use deductions for tax preparation expenses and unreimbursed business expenses. The law also reduced deductions for state and local taxes and interest on your mortgage.
However, the standard deduction increased for many taxpayers thanks to the TCJA almost doubling this deduction and expanding the tax bracket to receive them. For example, the standard deduction for married couples filing jointly for the 2018 tax year is $24,000. That’s compared to $12,700 in 2017.
But if you’re a married couple filing jointly with dependents, you may notice a reduction in deductions if you were depending on personal exemptions. So, it’s important to understand how changes to the tax laws can impact your tax liability. Assess your specific tax situation. Then consider using your money throughout the year according to the tax deductions that help you lower your tax liability.
It’s sound personal finance strategy to use your money throughout the tax year rather than waiting for a huge tax refund. Waiting to collect a large tax refund is like giving your money to the IRS as an interest-free loan. That’s because a tax refund often means you may have overpaid the IRS throughout the year.
Instead, rethink your savings strategy. For instance, pad your savings account by contributing more money to your tax-deferred retirement plan. Consider also building up your credit by paying down student loans and deducting student loan interest you pay off your taxes. Also, contribute to a flexible spending account and health savings account. These items are tax-deductible whether you itemize your taxes or take the standard deduction and can help you save and reduce your tax liability.
With tax law changes potentially impacting your refund, it’s time to rethink your savings strategy. When you sit down to do your taxes this year, choose the best online tax service to help you make the most of your situation and get your deductions exactly right. You’ll have more money throughout the year and make a bigger dent in your debt.
By focusing on reducing your tax liability throughout the year, you can manage your cash flow more effectively.
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