Many taxpayers were shocked this year when they completed their 2018 tax forms. They had assumed that the overhaul of the tax code, which cut income tax rates and nearly doubled the standard deduction, would do two things—lower their overall tax bills and either maintain or increase their refunds, which was the case for a good number of taxpayers. But in many ­cases, taxpayers ended up facing a bigger tax bite than in the past…and getting a smaller refund or even owing taxes. 

There were two culprits that caused this…

Culprit #1: Fewer Deductions

The new tax law eliminated or reduced various deductions that had made itemizing very valuable in the past. ­Example: The $10,000 cap on deducting state and local taxes hit many high- and even medium-net-worth residents of states with high property and income taxes, such as California, Connecticut, New Jersey, New York and Wisconsin. Taxpayers also lost deductions on certain types of home-equity interest, fees paid to accountants and investment advisers, job-searching and job-related moving costs, most personal-casualty losses and unreimbursed work-related expenses. To help make up for the extra tax bite…

Negotiate with your employer over unreimbursed expenses from work. You may have expenses that you pay out of your own pocket, ranging from using your personal vehicle for work-related reasons to special uniforms required on the job that are not suitable for ordinary wear. Starting last year, you could no longer use these expenses as personal itemized deductions on your income taxes. 

How to do it: Consider asking your employer to reimburse the expenses in return for an equal amount of salary reduction. For example, say you make $100,000 a year and spend $4,000 out-of-pocket for work without reimbursement. Request that your salary be reduced to $96,000 and the rest be given as a qualified employee reimbursement. If this is done correctly, your salary is still fully taxable and the other $4,000 is not (see IRS Publication 463). Many employers are willing to do this because it reduces the FICA payroll taxes they’re required to pay for you. Note: Reducing your salary could have some adverse consequences such as affecting your future raises if they are based on a percentage of your existing salary. For that reason, you may want to negotiate to have your annual bonus (if you get one) reduced, instead of your salary. 

Maximize “above-the-line” deductions. You can lower your taxable income level by maximizing a special class of deductions known as “adjustments to income” because they’re deducted ­directly from your gross income. The best known are tax-deferred retirement contributions to qualified retirement plans such as traditional 401(k)s and IRAs. But there are others to consider…

  • Contributions to health savings accounts (HSAs) and flexible spending accounts (FSAs) within IRS limits.
  • Student loan interest up to $2,500.
  • Teacher (K-12) classroom expenses up to $250.
  • Moving expenses if you are a member of the military who has been reassigned.

Pay off your mortgage. Millions of Americans who start taking the ­standard deduction rather than itemizing are no longer able to take advantage of one of the most popular and lucrative tax breaks—the deduction for mortgage interest payments. 

What to do: If you no longer take a mortgage deduction…and you calculate that you can save a substantial amount in interest payments by paying off or reducing your mortgage…consider doing so. Caution: Only consider this if you have enough money available to do it without eliminating an adequate ­emergency fund.

Culprit #2: Withholding Rates

The IRS changed withholding rates for 2018 to reflect lower tax rates, resulting in larger take-home pay throughout the year. Because employers withheld less money from each check, it may be the reason you got a smaller refund. 

To help lower the tax surprise: Check whether you need to update your withholding tax. Reason: You may be assessed a penalty if your 2019 tax withholding and estimated tax payments aren’t at least 90% of your tax liability for 2018. ­Ideally, your withholding should roughly equal what you’ll owe for the year. 

What to do: Check your most recent pay stub from work (or from your pension payments) and your 2018 tax returns. You’ll also want to factor in any investment income you expect to get from interest and dividends. Use the IRS online Paycheck Checkup tool to see whether you are withholding enough money from your paychecks and/or pensions to cover the taxes you likely will owe for the year, assuming this year will be similar to last year. The Paycheck Checkup also will show you how to request withholding changes on IRS Form W-4/W-4P, which you submit to the payroll administrator at work or for your pension. Note: If you are unsure what your income will be in 2019, at least pay enough tax through withholding and/or making quarterly estimated tax payments to avoid an underpayment penalty. To calculate quarterly estimated taxes, go to IRS.gov and search “Estimated Taxes Small Businesses.”