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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

Pay-As-You-Go

I was in a Political Science course recently and was surprised to realize that there are some who do not understand the correlation between the tax dollars we pay and the money that the government has to spend. In other words, our taxes are what the government has available to them to spend.

Consider the following: what if your weekly paycheck began coming to you on an irregular basis and in varying amounts? Besides the obvious frustration with our employer, think about how you would be able to pay your bills, buy groceries, or even have the gas to get to work. Would this change the way that you approached your spending? How about your stress level? Now, on top of this new varied pay schedule, imagine that your employer comes to you once a year and asks you to refund them a substantial over-payment of wages. Are you freaking out yet?!

Let’s add another layer to this. Not only is your income coming in sporadically and you have to pay some back, now your employer tells you that you have to apply for your pay and will get paid when they get paid from their customers. You have a great week and you work a lot of hours and go through the process of requesting your pay, but you have been waiting a month or even a year to get that payment. Even worse, it never comes in. During a busy time you forgot to put in your request for payment and by the time you remember it is past the deadline for collecting that money from your employer.

This is what the Treasury Department of the United States goes through each year. I have no interest in getting political and want to just talk numbers and cash-flow. The current year budget is based on an estimated $3.643 trillion. According to The Office of Management and Budget, reported by http://www.thebalance.com, “the federal government’s revenue comes from Individual Income taxes that contribute $1.822 trillion, over half of the total. Another third, $1.295 trillion, comes from your payroll taxes. This includes $949 billion for Social Security, $289 billion for Medicare, and $46 billion for unemployment insurance.” (https://www.thebalance.com/current-u-s-federal-government-tax-revenue-3305762)

IRS Commissioner Charles Rettig reported on 4/10/19 that as of March 22nd, the IRS had issued $191 billion in tax refunds. That is 5.25% of the total federal budget. You may be thinking that is a rather small percentage and manageable, so let’s throw in your household income and see what happens. Assuming you bring home $1,000 per week for a total of $52,000 per year, you would be asked to refund your employer $2,730 every year. That is an average of $52 per week that you receive.

That $52 per week may be manageable, but there is more. The IRS estimates that the average Tax Gap (the amount of uncollected tax) for the each year during 2008 – 2010 was $458 Billion per year. That is 13.23% of the total budget! On top of that, the IRS was holding on to approximately $1.4 Billion in refunds that were nearing the three year deadline for payment. That accounts for another 3.85% of the budget. Lucky for the government, anything that is not claimed is sent back into the coffers to offset the refund paid out and the Tax Gap.

Now, instead of just the $52 per week that you have to hold back, your employer is going to keep about $6,900 of your total salary. We are up to $185 per week that you may or may not receive over the course of the year. Just for fun, your employer remembers that they didn’t ask you to pay back enough a couple of years ago so they request an additional $2,000 to be paid back to them, another $38 per week! That brings our grand total to $223 of each pay check that we may or may not receive or be able to keep. That equals 22.3% of your $52,000 annual salary. That is a significant number!

Looking at the government budget of $3.643 trillion, that is $8.124 billion in money that may or may not come in and if it does, it has to go back out again.

With the release of the new W-4 form and the adjustment to the withholding tax tables, the guiding principal was to close the gap between what is coming in and what has to be refunded. The tax code is setup as a “pay as you go” system to help encourage a steady cash-flow. For most of us our taxes are taken out of our paychecks and we do not even think about it. However, how many of us have a side hustle or a second job or are out there on our own running a small business? With the raise of the gig economy (Uber, Lyft, Shipt, Instacart, etc.) there is a need to be aware of tax implications of this type of income.

My Free Advice this Friday: Check your withholding! Make those estimated tax payments! Being proactive helps the cash-flow for both you and the Treasury Department.

Check back next week for a look at the taxing changes for your side hustle.

~Amy

The Plot Thickens

Hi, everyone! I think I am finally recovered from tax season.

Today the IRS released a new W-4 form to more accurately reflect the amount of tax liability that you will have during 2019. You can view the new form here. Although the first page does not look very different, the worksheets that accompany the form are a bit more complicated.

To begin processing the worksheets, you will need to review two separate IRS Publications, process several different If/Then situations, and figure out how many children will qualify for the child tax credit. Once you have that info you will multiply the number of kids that qualify by either 2 or 4, depending on your total income for the year. If you want to tackle itemized deductions, adjustments or additional income you get to subtract, add, subtract, divide, and add again. Then, if you and your spouse both work you need to interpret two separate tables. But first you must figure out the total highest paying job and the lowest paying job and then look at the qualifier to be sure you don’t enter more than “3” no matter what the table says. And then you will need to find some other numbers on the worksheet, subtract, find the amount on another table, and multiply that amount by a different line and then divide by the number of pay periods remaining for 2019.

Or they have an app on their website www.irs.gov/W4App that will calculate your withholding status for you.

For the app, you will need to have your paycheck stubs handy so you can list your earnings, retirement contributions, and health insurance deductions. You will also need to decide which credits you are eligible for and the amounts of any student loan interest or other adjustments that you will claim on your tax return at the end of the year. Then once you have entered all that information for all the jobs that you and your spouse have during the year, you will need to estimate your itemized deductions. The website will calculate which is better, standard or itemized, and generate a results page. After running a married filing joint scenario with no dependents and an annual income of $50,000 I was astonished to see that the W-4 should be completed with Married 6 as the withholding status.

All I can say is, wow!! The idea of just being able to mark Married 3 if you are married with 3 kids has gone out the window. If this makes your head spin, I understand. It took the IRS 18 months to come up with the new form and worksheets. I figure it will take us all that long to fill them out.

This should help you see the incredible changes that were brought into the tax code with the Tax Cuts & Jobs Act. While we are all still recovering from some shocking results during the 2018 tax season, we can now begin to plan for 2019.

My Free Advice this Friday: Check out the new form or the App. You may be surprised by the results! If any questions arise, you know where to find me!

Check back next week for a look at our Pay-As-You-Go Tax System.

~Amy

Let’s talk about 2019

There are only 3 weeks left until the April 15th filing deadline. It has been a busy season with mixed results for some clients. I think that it is safe to say that the 2017 Tax Cuts and Jobs Act has proven to be as far reaching as it was promised. While the results are not always expected, they are starting very important conversations regarding tax planning. Most people think that tax planning is only for the wealthy who are trying to get out of paying taxes, but that is not true. Most taxpayers have options available to them that would help to manage the amount of tax that they pay. The options range from utilizing a Health Savings Account (if eligible) to pay medical expenses with money that is not taxed, to simply adjusting the amount of withholding that is coming out of your paycheck each pay period.

One question that I like to ask a client is, “what is your tax goal? Do you want to breakeven or get a large refund?” Then I explain how to go about each option and provide answers as varied as my clients. So I am asking you, “What is your tax goal?” and more importantly, “how are you going to get there?”

If you owed more money than you expected, here are the three options available to you:

  • 1 – Leave everything the same and plan on owing again for 2019
  • 2 – Change your withholding; have more money taken out before you see it
  • 3 – Make quarterly estimated payments to the IRS

If you received a large refund here a couple of things to consider:

  • 1 – You just gave the government more money than necessary during the year, interest free.
  • 2 – The IRS would prefer that taxpayers fall into a $2,000 range of owing or getting a refund. Although there is no penalty assessed for a refund over $1,000 there is a penalty assessed if you owe more than $1,000 for more than one year in a row.

My free advice this Friday: Let’s talk! Tax planning is not just for the wealthy.

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