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Wrestling with Results

It has been a very interesting three weeks since the IRS opened the e-filing season. We are seeing varied results compared to last year and generally those results are less money coming back to clients as refunds. This causes a state of bewilderment and frustration to those who traditionally count on their refund for certain expenses. We understand that the news is surprising to those who have filed and worrisome to those who are still not ready to file. Although we cannot change the 2018 results, there is good news for 2019.

In researching the withholding tables for 2017 to 2018 and 2018 to 2019, I have found that the adjustment has been made. This means that there should not be a dramatic change in withholding for 2019 compared to 2018, unlike the adjustment that we are currently seeing from 2017 to 2018. While this may not be good news, we do have a couple of options for 2019.

Option #1: Keep everything the same and expect a smaller refund when filing for 2019.

Option #2: Review the withholding on your paycheck and make changes. Remember the smaller the number the higher the amount withheld! If you are already claiming Single with 0 dependents, you are able to request an additional dollar amount to be withheld. You can follow this link to complete a new 2019 Federal W-4 to change that withholding.

My free advice this Friday: Ask questions and be proactive. 2018 tax returns have been a surprise, but 2019 returns don’t need to be.

~Amy

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Pardon the interruption…

My free advice from last Friday: do not think that you can clean, sort, organize, and move an entire household in three days while prepping for the first 16 day stretch of your tax season work-cation. It does not work well. This Friday finds me in one location and enjoying meeting with our amazing clients while doing the work that I love.

The IRS filing season has officially been open for 12 days. In those 288 hours Ralph and I have prepared over 70 tax returns. With most of those returns, we are seeing lower refunds due to lower withholding (see my previous post regarding withholding) on federal returns. Generally, state and local returns are not seeing dramatic changes due to the simple flat tax that each imposes.

Refunds are being received, but remember that in order to help safe-guard against identity theft, those tax returns claiming the Earned Income Tax Credit and/or the Additional Child Tax Credit will not be released until the 15th of February. However, the actual receipt of the refund could be a bit longer depending on IRS and financial institution processing time. You can keep an eye on your refund via our website www.sayeandassociates.com; click on “Check your federal refund” on our Links page. For all other returns, and all returns filed after February 15th, the general rule is that you should have your refund 21 days from the acceptance date. Please remember that once we have sent the return and received an e-file confirmation, what happens next is completely out of our hands.

What to expect in the next 1,560 hours: I anticipate that we will consume well over 15,000 mg of caffeine, go through over 20 cases of paper, spend over 1,000 more hours at our desks, and prepare an estimated 200,000 different tax forms! In 1,561 hours we will be sleeping where we fall.

My Free Advice for this Friday is bookmark our website so you can keep an eye on your refunds.

Check back next week for an update on how our office staff survives the season. It may or may not involve Nerf guns.

~Amy

What to expect on your W-2

Our office not only prepares tax returns, but we also do accounting and payroll work for small businesses throughout the Battle Creek area. We are just finishing up the year-end rush to complete hundreds of W-2 and 1099 forms. Now, the phone will start ringing as employees begin to get the results of their tax returns. We will get everything from “why didn’t you take any taxes out?” to “please take another $50 out of each check.” So, my free advice this Friday is a basic lesson in payroll withholding.

My first piece of advice – Look at your paycheck stub! Be sure that all the information is correct. All the information that will be used to create your W-2 is listed on the stub. Be sure your name is spelled properly; your address is correct, and your social security number is accurate. If you move, please be sure to inform your employer to update your address. It can change the taxability of your income.

Next – The higher the number the lower the withholding! When we begin a job, our employer has us fill out an entire stack of paperwork. Some of the forms that need to be completed are a series of W-4 Forms. These forms tell the employer how much tax to withhold out of your paycheck for the various taxing authorities. If you list your filing status as Married with 9 dependents and you make $750 a week, you will not have any withholding coming out of your check. The reason is that the payroll software makes assumptions about your tax situation based on the information that it has. In this example, the software will average out the amount of income to show that you will earn $39,000 during the year and that you will have no tax liability after the $24,000 standard deduction and credits for the 9 dependents.

Then we have the doubles – Double Wage Earners or Double Income Sources; this creates a new level of complication that payroll software does not have the information necessary to compute the entire situation. My husband and I have always been a double income household, so I know the added complication of having two sets of wages to put together at the end of the year. Remember, payroll software only works with the numbers that it is given and is not clairvoyant. When my paycheck is calculated, my earnings are annualized, and taxes are calculated on the assumption of that being my only income. The same happens for my husband’s paycheck. When we put our income together for tax filing, the income falls into a different tax bracket. This can also happen for retirees who have pension income, social security income, and retirement account distributions.

Finally – prepare for some surprises! 2017 withholding verses 2018 was a dramatic change. For a single person with no dependents making $500 per week, the 2017 withholding was $60, and in 2018 it is only $48. While most of us probably noticed that we got a few more dollars in our paycheck each week, we were not thinking about the cumulative effect at the end of the year. In 2017 this person would have had $3,120 paid in towards their tax liability, in 2018 that number drops to $2,496. While both examples will still result in a refund, the 2018 refund will be roughly 15% less than in 2017.

To sum up this Friday’s free advice – Be sure to look at your paycheck stubs, check your withholding status, and brace yourself!

Check back next week for an update on the start of e-filing season and refund schedules.

~Amy

Bracket vs. Effective, huh?

Every industry has their own jargon; their own foreign language. Using everything from buzzwords and phrases like “dive deep” or “put a pin in it” to legalese like “prima facia” and “ipso facto,” professionals expect you to understand what they are talking about. The tax world is no different. Bifurcating the depreciation versus taking a Section 179 deduction are words that I use in everyday conversation, while the listener smiles and nods and hopes I will not go on and on about it for the next five minutes. Jargon is a pitfall of familiarity. To help you understand how progressive our tax system is, I present the following vocabulary lesson.

Taxable Income: The amount on income that is left AFTER you make all your adjustments and take out all your deductions. For example, a married couple with $100,000 in wages with no adjustments to income taking the standard deduction of $24,000; their taxable income is $76,000.

Tax Bracket: The highest rate of tax that you will pay on your taxable income; couple above would be in the 12% tax bracket

Effective Tax Rate: The ACTUAL percentage of tax that you pay on your income; Same couple pays 11% tax.

Progressive Tax System: Not a political thing, I promise! As you earn more money, you progressively pay more in tax. Everyone pays the exact same amount of tax at each level of taxable income; the difference is how much income you have.

According to 2017 tax return data, 96% of all individuals have an adjusted gross income (before deductions) of less than or equal to $200,000. 96%!! In the range of $200,000 to $500,000 is a mere 4%, while those individuals earning $500,000 to less than $10 million were only 0.87%.

I think it is safe to say that most of us fall into the under $500,000 range. Believe it or not, we all pay the same amount of tax on our earning at each level.  Below is a depiction of how taxes are calculated in our progressive system. I am using Married Filing Jointly tax brackets and limits with different income levels.

Married Filing Joint with Taxable Income of $77,400
First $19,050 taxed at 10% $   1,905.00
Next $58,350 taxed at 12% $   7,002.00
Total Tax Paid $   8,907.00
Effective Tax Rate11%

Married Filing Joint with Taxable Income of $175,000
First $19,050 taxed at 10% $   1,905.00
Next $58,350 taxed at 12% $   7,002.00
Next $87,600 taxed at 22% $ 19,272.00
Final $10,000 taxed at 24% $   2,400.00
Total Tax Paid $ 30,579.00
Effective Tax Rate17%

Married Filing Joint with Taxable Income of $400,000
First $19,050 taxed at 10% $   1,905.00
Next $58,350 taxed at 12% $   7,002.00
Next $87,600 taxed at 22% $ 19,272.00
Next $150,000 taxed at 24% $ 36,000.00
Final $85,000 taxed at 32% $ 27,200.00
Total Tax Paid $ 91,379.00
Effective Tax Rate23%

This illustration shows how the tax rate progressively increases as your income climbs. However, your effective tax rate can be very different from your tax bracket. The next time someone tells you that they are in the 32% tax bracket, first congratulate them, then remind yourself that they are not paying a full one-third of their income to the government in taxes they are only paying about one quarter. In this case, the difference is the cost of a rather nice brand-new car.

There are other factors that have an impact on your effective tax rate, but I think I should stop here before your eyes glaze over.

My free advice this Friday – your income tax bracket does not define you, but your effective tax rate might. If you play your cards right, you can bring your tax rate down into the single digits. If you are interested in finding out more about your unique effective tax rate, you know where to find me!

Next week we’ll talk paycheck withholding; you might want to look at your check stubs!

~Amy

Looking for Deductions, Aye?

One of the continuing education instructors that I really enjoyed this past fall called the Schedule A an endangered species. The Joint Committee on Taxation reported that in 2017 46.5 million tax returns claimed itemized deductions and they are estimating that itemizers will drop to 18 million in 2018. This is a full 60% decrease in Schedule A filers. Before you automatically ignore the possible deduction please consider the following.

The following deductions are like the Giant Panda, endangered but still around.

  • Medical Expenses: No changes to what is deductible. For 2018 the floor for these deductions is 7.5% of your Adjusted Gross Income (AGI).
  • State, Sales Tax, Personal Property and Real Property Taxes: These deductions are all still available, the only change is that they are capped at $10,000. No taxes paid over that amount will be deductible.
  • Interest: Mortgage interest & points paid – the only change is the limit to the amount of acquisition debt that is allowed. If your mortgage is over $750,000, there will be a limit on the amount of interest that is deductible. This is down from $1 Million.
  • Charitable Contributions: The only change here is the increase in the total limit that is deductible, up 10% from 2017 and now 60% of your AGI. All other rules remain the same.
  • Non-Business Casualty Losses are now only deductible if they are related to a Presidentially-declared disaster area.
  • Gambling losses to the extent of winnings and repayment of compensation – no changes.

Now the bad news – gone the way of the Dodo Bird are the deductions that were subject to the 2% floor. Employees with unreimbursed business expenses will be the ones that are most affected by this change. There are no longer any deductions for mileage, union dues, cellphone usage or travel expenses for employees (business deductions have not changed). The other expenses in the eliminated section are your tax prep fees, IRA separately billed fees, and safe deposit fees. Ask us about ideas to help ease the pain of losing these deductions.

My free advice this “Friday” – don’t automatically assume that the Schedule A has become extinct, be sure to do the math and ensure your maximum deductions.

Check back next Friday to see how progressive our tax system is.

~Amy

Midweek Mayhem!!


Photo by Madison Kaminski on Unsplash

As most of you know, the IRS has been asking tax professionals to ensure that credits and tax benefits are only given to those who qualify. In our case, that means asking our clients (some who have known me since I was a lot shorter than I am now) for additional documentation for our files.

Well, I think it is safe to say that the IRS is no longer asking. Beginning in the 2019 tax filing season (filing 2018 tax returns), the IRS will levy a penalty on the tax professional of $520 per credit that was not properly documented. These penalties could reach as high as $2,000 for one tax return!! I need a minute… this makes me a bit light headed….

Deep breath!

If you are thinking that every year we seem to be asking for more information, you are correct. Identity theft and tax return fraud continue to grow and those of us who follow the rules are shouldering the burden of proving our eligibility for credits and tax benefits.

Luckily the IRS has provided us with guidance to ensure that all of our (cough)(cough) are covered. We are currently in the process of trying to figure out the best way to get the information out to our clients before they drop off their information. We do not want anyone to have to make extra trips or gather information a second time.

Please share these links with everyone you know, whether they are a client of ours or not, all tax professionals have the same due diligence requirements. Click on the link for each of the credits or filing status that you think you may be eligible for and find the documents that we need to be able to claim that tax benefit for you.

Head of Household Filing Status
https://www.eitc.irs.gov/eitc/files/downloads/f886-h-hoh.pdf

Dependent – Qualifying Child or Qualifying Relative
https://www.eitc.irs.gov/eitc/files/downloads/f886-h-dep.pdf

Earned Income Credit
https://www.eitc.irs.gov/eitc/files/downloads/f886-h-eic.pdf

American Opportunity Education Credit https://www.eitc.irs.gov/eitc/files/downloads/Form_886_H-AOC.pdf

As always, we are in this together! Let us know if you have any questions. I am going to go do some more deep breathing to try to forget about those penalty numbers.

~Amy

No Exemption, But More Credits

I have spent hours reviewing the Tax Cut and Jobs Act (TCJA) and the conclusion that I have come to is that it is far from simple. Anytime I face such an overwhelming change in the way that I am used to doing things, I tend to dig in my heels and make it far more difficult than it needs to be. Ask my co-workers about the time the paperclips in the office got switched from smooth to non-skid. Not one of my finer moments, but I can promise you we never had non-skid paper clips again. In an effort to be more mature and pliable, I present the following information regarding the non-existent personal exemption and how it can impact your tax return this year.

The TCJA has reduced the personal exemption for tax years 2018 – 2026 to $0.00 and doubled the Standard Deduction amount for each filing status.

Although the exemption amount is now $0.00, there are still benefits to claiming dependents. The Child Tax Credit (available until the year the child turns 17) has been doubled! For a limited time only, you not only get a $2,000 tax credit per child, but you can also make more money and still qualify for the credit. But wait! There’s more! Beginning in 2018 there is a $500 tax credit for qualifying dependents other than children.

For Example:

My husband and I have 3 children, two that are completely independent and one that turned 17 in 2018. In 2017, our total deductions (standard deduction – $12,700 & 3 personal exemptions – $4,050 each) totaled $24,850 and we received the child tax credit of $1,000 for the last time.  In 2018, my husband and I will still be claiming our 17-year-old and the numbers are not as pretty. We will get $24,000 for the doubled standard deduction and the kid will qualify for the $500 tax credit as an “other qualifying dependent.” For those of you playing along at home, no your math is not wrong; our family just lost $1,350 in deductions.

My free advice this Friday – Never buy non-skid paper clips and check out the interactive tool on the IRS website to figure out which credit your dependent qualifies for.

Check back next week for free advice about standard versus itemized deductions, it is a whole new game!

~Amy