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

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

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