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!


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.


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

Dependent – Qualifying Child or Qualifying Relative

Earned Income Credit

American Opportunity Education Credit

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.


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!


Buckle Up, Buttercup!

As I write this post, it is being reported that 90% of the IRS employees have been furloughed due to the current government shutdown. The funding bill will be put to the new Congress on January 3rd and we will have to wait and see what happens.

Back in September, the Treasury Inspector General for Tax Administration (TIGTA) released a report explaining the challenges that the IRS is facing to implement the Tax Cuts and Jobs Act. It was estimated that it would take more than 1.1 million labor hours of 542 full-time employees to implement the new tax provisions. As of June 2018, only 117 current and new employees had been assigned to this task. In short, deadlines have not been met, staffing is not in place, and we are waiting for funding to even get back in the door.

The opening of the 2019 filing season, which usually happens toward the end of January each year, has not been set and most people are not even guessing as to when it will happen. We are really hoping that it is before April 1st.

Remember! You still have filing requirements!

Even though the IRS is only operating on 10% of its staff, taxpayers are still required to pay estimated taxes by January 15th, employers will still have to file W-2s and 1099s by the end of January and unless there is an act of Congress, you must still file and pay your income taxes by April 15th.

My free advice for this Friday – Buckle Up, Buttercup. It is going to be a bumpy ride!

Check back next Friday for some free advice regarding the no-longer available personal exemption.


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Stay Tuned…

In the next several weeks, I will be posting general information about the tax law changes that I think will have the most impact on our clients. Please comment any additional topics or questions that you may have. I will not be able to address specific situations, but we can discuss the general rules and how they apply. If you do find that you have a specific question, feel free to make an appointment to chat with me about your unique situation. You can access my schedule at Talk soon! ~Amy