Here in the US it is that time of year again - tax season. This year there is even more pressure due to the changes in the tax law and the resulting changes in tax forms. (If you are here in the US and you have not seen the new forms - they are small, at least for the 2 main pages.) Some of you may find that your taxes are lower - others will find that they are higher - and I don’t mean your refund, I mean your actual taxes. Don’t forget, you have an actual tax amount that is calculated by filling in your tax form, then subtracting from that amount the amount you prepaid during the year - through withholding and/or payment of estimated. So if one’s withholding, say from one’s paycheck - the common thing from which most people have withholding taken - is more than it has been, one will either be overpaid more than usual and get a refund or owe less than usual and pay in less - but one’s actual tax - the total of the amounts withheld, paid as estimates and any amount due (or less any amount withheld) is your actual tax amount. Does that make sense? Due to the changes many people will have had less withheld from their paycheck - so if their tax is the same as last year’s - they will either owe more or receive less as a refund, even though their tax is the same.
Supposedly most people will be paying less in actual tax (the total mentioned above), but many will not. A client of mine is retired and in the past paid no income tax due to high itemized deductions. This year due to the changes I estimate that his poor man will be paying around $600 in taxes. IRS has an online calculator to check one’s withholding and I had used it during 2018 to check all of my clients (and my) taxes with it, and this calculation is done using same.
He is retired. His income is almost entirely Social Security. His deductions should be the same as last year. How come his taxes are higher than before? Well, the information about the changes left out some things - one of them is that is in past years each person was entitled to a personal exemption of (in recent years) just over $4000. They were eliminated in the changes.
What does this mean? If one has always filed using standard deduction then one was entitled the standard deduction plus a personal exemption for themselves plus same for each person they were taking as dependants, plus their spouse (on the same return filing jointly or their own return if filing married separately). So a couple was entitled to exemptions totaling $8000, a family of 4 was entitled to exemption totaling $16,000 and those exemptions no longer exist. If one is taking the new standard deduction and one is single with no dependants than their new standard deduction is more than last year’s standard deduction plus exemption , but if they have any dependants - such as a single mom with a child, it is less than same was. Similarly, a couple with no dependants will find that the new standard deduction for same is more than the old standard deduction plus their 2 personal exemptions totaled, but if they have additional dependants - children and/or elderly parent for example - the new standard deduction will be less than the old one plus their personal exemptions were.
Now, if one has been itemizing deductions they were also entitled to the personal exemptions, and are no longer entitled to same, but since they listed their actual deductible expenses they do not pick up anything additional to replace their lost personal exemptions. In addition a variety of items which were deductible in the past in a category of “other deductions” if the category was more than 2% of their income are no longer deductible. Depending on where they live they may also be losing part of their state income tax/real estate deduction. Now, it is possible that the new standard deductions might be higher than their itemized deductions and they can take same as deduction, but chances are that even if this is the case, it will still be less than they were able to deduct last year as itemized deductions plus personal exemptions - whether they have other dependants or not.
So, this year make sure to gather your related tax papers - W2 forms, assorted 1099 forms, forms from any other income you have - such as K1s and records of other any other income you have to list. Then make sure that you have all of your deductions - medical (insurance premiums, copayments, deductible payments, doctors, prescriptions, etc. ), taxes - real estate, state & local income taxes (still allowed up to $10,000), interest on your mortgage, and charitable contributions. (Medical is still limited to same in excess of a certain amount). Make sure that you check carefully with your tax preparer as to what else you should include this year. Don’t wait until the time to file is about to approach (only just over a month left) in case you have any questions or find that you need to come up with money to pay income taxes that you did not anticipate paying. If you due your own returns - leave extra time to figure out the new forms. There are some programs that will help one prepare their taxes (free) if you need help including one called VITA from IRS that uses volunteers to help people.
Your state income tax forms may have been changed also as a result of the Federal changes. The state I live in has traditionally used the Federal return information as a start and one then made changes to it. This year those changes include allowing some of the items no longer allowed on the Federal return (such as real estate taxes in excess of $10,000) and will have extra forms to fill in for same also.
And this is a good time to decide to do better to have your paperwork organized for next year when tax season comes again.
Past posts on income taxes that may be of interest to you -
http://wheredidileavethat.blogspot.com/2016/03/gathering-papers-for-income-taxes-part-1.html
http://wheredidileavethat.blogspot.com/2016/03/gathering-papers-for-income-taxes-part-2.html
http://wheredidileavethat.blogspot.com/2017/04/holidays-and-taxes-unrelated-subjects.html
http://wheredidileavethat.blogspot.com/2018/02/income-taxes-are-here-again.html
THOUGHT OF THE WEEK -
Take the time to put together your tax papers properly and completely now, while there is time to find missing information or get it replaced. If you have someone do your income taxes - contact them soon about having your taxes done. If you do your own - leave extra time this year to figure the changes that have been made and how they affect you.
As you put together the paperwork - think about what you can do to make next year’s taxes either
to do.
Again, this is general information and not tax preparation information related to you. Check with your tax preparer about your specific information needed.
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