The Tax Cuts and Jobs Act (TCJA) passed in late 2017 made big tax changes, including to individual tax rates. If you are self-employed or retired and pay your taxes on a quarterly basis, calculating your new tax obligation is going to be a little more complicated than usual.
That’s because it could be difficult to estimate your tax obligation under the new tax code, which eliminated personal exemptions, lowered tax rates, suspended many itemized deductions and created a new small business deduction. The first-quarter estimated payment is due on Tuesday, April 17, and penalties are still in place if you underpay your tax obligation.
Here are some tips to handle quarterly payments under the new code:
- Use the safe harbor. Because of the more than 500 pages of tax code changes, it may be best to use the “safe harbor” option, which is based on what you paid in tax last year. Under the safe harbor, as long as you withhold at least 100 percent of last year’s tax obligation, you won’t face an underpayment penalty (with an exception – see the next tip). This is true even if you end up underpaying and owing the IRS next year.
Simplicity is the best thing about the safe harbor. Just look at what you paid last year, and do the same this year. The downside is that you may overpay and end up waiting for a larger refund to arrive next year.
- Take care if your income is expected to be over $150,000. If you cross the $150,000 threshold, the IRS requires your safe harbor payments to be 110 percent of last year’s tax amount, rather than 100 percent.
- Get your estimated payment calculated. The IRS put up a withholding calculator on its website in late February that reflects the new TCJA changes. You can use it to calculate your estimated payments based on what you expect to earn in 2018. As long as your estimate for this year comes within 90 percent of your actual tax obligation, you won’t face an underpayment penalty.
Consider using the estimate option if you expect this year’s income to be the same or lower than last year’s. If your income is expected to be much greater this year, it may be harder to make the correct adjustments to your quarterly payments. In that case, the safe harbor option may be your best bet.
Taking the time to make changes now will help you make a smooth transition under the new TCJA rules and prevent any surprises at tax time next year. If you have any questions or need assistance to determine your quarterly tax payments, please reach out for help.
Three-fourths of filers get a tax refund every year, with the average check weighing in at $2,895. Here are some ideas to put that money to good use:
#1: Pay off debt. If you have debt, part of your refund could be used to reduce or eliminate it. With high-interest credit card or auto loan debt, you have to work harder just to counteract the effect of the debt on your financial health. Extra payments on your mortgage put more money in your pocket over the long haul.
Bonus tip: Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden as low as possible.
#2: Save for retirement. Saving for retirement works like debt, but in reverse. The sooner you set aside money for retirement, the more time you give the power of compound interest to work for you. Consider depositing some of your refund check into a traditional or Roth IRA. You can contribute a total of $5,500 every year, plus an extra $1,000 if you are at least 50 years old.
Bonus tip: You have until April 17 to make an IRA contribution for 2017. You may be able to use a contribution to a traditional IRA to lower your 2017 tax burden, depending on your income level and whether your employer provides a retirement plan.
#3: Save for a home. Home ownership can be a source of wealth and stability for many people. If you dream of owning a home, consider adding your refund to a down payment fund.
#4: Invest in yourself. Sometimes the best investment isn’t financial, it’s personal. A course of study or conference that improves your skills or knowledge could be the best use of your money.
#5: Give to charity. Giving your refund to a charity helps others and gives you a deduction for your next tax return.
#6: Don’t give to scammers! Scammers are using a new tactic to separate people from their tax refunds. First, they file fraudulent refunds on behalf of their victims. Then, after a refund check arrives at the taxpayer’s address, they impersonate an IRS agent over the phone and demand to be sent the refund because it was sent in error. Remember, real IRS agents will never call over the phone and demand immediate payment for any reason.
Finally, consider saving some of your refund to have a little fun. If you use some of the ideas mentioned here, you can feel comfortable you are taking a balanced approach with your refund.
If you’ve ever had to care for a sick, elderly or disabled person, you know it can be difficult financially as well as emotionally. A recent study found that many caregivers are forced to make financial sacrifices, including delaying retirement, in order to help their loved ones.
Luckily, there are three key federal income tax breaks available to help lighten the financial burden on caregivers. Here are some tips to help take advantage of them:
Tip #1: Use the new “family” credit
The Tax Cuts and Jobs Act (TCJA) passed in late December creates a new “family” credit for dependents that aren’t eligible for the Child Tax Credit. This is a $500 tax credit that you can claim for each dependent other than children under age 17, starting in the 2018 tax year. Generally speaking, these are for relatives and others who are members of your household and for whom you provide more than half of their support.
Bonus tip: The TCJA also sharply increased the phaseout threshold for claiming the Child Tax Credit and the new family credit, to $400,000 for married joint filers and $200,000 for individual filers. This extends those credits to many more people, so it’s worth revisiting if you weren’t eligible before.
Tip #2: Use the medical expense deduction
Caregiving often comes with medical expenses. The good news is that you can claim a deduction for the medical expenses you pay for your dependents.
The TCJA retroactively lowers the threshold for claiming the medical expense deduction to 7.5 percent for the 2017 and 2018 tax years, meaning that you can deduct any medical expenses higher than 7.5 percent of your adjusted gross income. The threshold rises back to 10 percent in 2019 and following years.
Bonus tip: You can still claim the deduction for medical expenses for a relative even if that person wouldn’t otherwise be classified as a dependent (such as when they don’t live in your household), as long as you provide more than 50 percent of their support. In the case where multiple people together provide more than 50 percent of the support for a relative, you can collectively decide who gets to take the deduction as part of a “multiple support agreement.” This is useful when, for example, siblings share the cost of caring for elderly parents.
Tip #3: Use the Child and Dependent Care Credit
If you are also working while acting as a caregiver for a dependent, you may be able to use the Child and Dependent Care Credit to offset part of the cost of their care. The dependent must be physically or mentally incapable of caring for themselves and must live in the same home as you for more than half the year. Depending on your income, the credit can be applied against 20 percent to 35 percent of qualified expenses, up to a total maximum credit of between $600 and $1,050 for one dependent.
Bonus tip: Both you and your spouse must be working during the year to claim this credit. If your employer provided any dependent support as part of a benefits package, the amount of the credit is reduced by that amount.
If you have any questions about the tax benefits available to you, don’t hesitate to get in touch.
One of the things that’s going away under the new tax reform laws implemented this year is an employee’s ability to deduct unreimbursed expenses related to their job.
Farewell to miscellaneous itemized deductions
The deduction for unreimbursed employee expenses was among the qualified 2-percent miscellaneous itemized deductions that were eliminated by the Tax Cuts and Jobs Act (TCJA) passed in late 2017. This could be a blow for employees who had relied on it to deduct unreimbursed expenses for such things as work-related meals, entertainment, gifts, lodging, tools, supplies, professional dues, licensing fees, work clothes and work-related education.
A win-win solution
If you are an employee who has used this tax deduction, here are some tips to minimize its loss:
- Determine the impact. Review your past tax records to help estimate how much you expect to pay in unreimbursed work expenses and what the tax deduction was worth to you.
- Discuss the situation with your employer. If the loss of this deduction is a hardship, talk to your employer about how you will be affected.
- The win-win. Ask your employer to consider reimbursing you for your work-related expenses directly. Your employer can probably deduct those expenses from their business return without increasing your taxable income. This will save them tax dollars when compared with the cost of raising your pay in order to indirectly compensate you for your unreimbursed expenses.
If you are an employer, consider talking to your employees about their unreimbursed expenses now that the tax laws have changed. If you wish to reimburse their qualified business expenses, make sure your reporting adheres to IRS accountable plan rules so that your reimbursements are deductible as a business expense and do not add to your employees’ incomes.
In the federal budget bill passed Feb. 9, Congress revived dozens of expired tax breaks retroactively for 2017. Here are the ones you may be able to use:
- The tuition and fees deduction. If you paid qualified tuition and related higher education expenses, you may be able to deduct as much as $4,000 of those costs. This can be done on a regular return (without itemizing). The deduction is capped at $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less ($130,000 joint) and at $2,000 for single filers with AGI of $80,000 or less ($160,000 joint). This tuition and fees deduction can be a nice alternative to using the American Opportunity Tax Credit or the Lifetime Learning Credit.
- Mortgage insurance deduction. If you pay mortgage insurance premiums, you can now deduct them as an itemized deduction. This deduction phases out for taxpayers with AGI of $100,000 or more.
- Mortgage debt forgiveness exclusion. If qualifying mortgage debt on your primary residence was discharged or forgiven, you can exclude that amount from your income taxes.
- Energy-efficient home improvement credit. If you purchased energy-efficient home improvements (such as upgrades to windows, or heating and cooling systems), you may be able to take a tax credit equal to 10 percent of the amount paid, up to $500.
Bonus Tip: If you’re eligible for any of these but you’ve already filed, you may still be able to claim these by filing an amended tax return.
If you think you qualify for any of these, remember to bring all related documentation to your next tax filing appointment. The IRS is now scrambling to figure out how to apply these late changes to the already published 1040 tax form for 2017.
Your mailbox has started filling up with tax forms over the last several weeks and there are likely more to come. Getting your forms organized makes your tax filing easier for everyone involved. Here are some tips on how to handle all the forms you get and to head off any potential problems.
Collect them all
Check last year’s tax records, and make a list of the forms you received. Add any new accounts, employers or vendors and check the forms off as you get them.
Gathering all your forms is important because the IRS gets copies of each form sent to them as well. Missing one can trigger an IRS correspondence audit, creating extra work and possibly delaying your refund.
Check for digital forms
More employers, banks and others are making their tax forms available to you electronically, so you may not get a paper form in the mail. Be sure to check your email inbox for any missing forms before you file, and don’t forget to check your “junk” or “spam” email folders as well, just in case any tax information accidentally ends up there.
Double check to see if there are any errors on the forms you receive. If there are, contact the issuer via phone and in writing to get the problem fixed. If you can’t get a corrected form, still report everything on your forms to the IRS, but add a correction explaining the error when you file your return. That way you can still file without waiting for the issuer to send you a corrected form.
Commonly overlooked forms
While getting all your W-2 and 1099 forms is important, there are two crucial forms that you also need before you file:
- 1095 – Proof of health insurance, required under the Affordable Care Act (ACA). If you don’t have health insurance, you’ll have to pay a fine during tax years 2017 and 2018 (this requirement goes away in 2019). There is an approved delay for sending forms 1095-B and 1095-C until March 2, 2018. This delay is not granted for 1095-As provided to those using the marketplace to purchase insurance.
- 1098-T – Confirmation of tuition and fees paid to qualified educational institutions. If you’re taking an education deduction, you’ll have to have one of these forms from your accredited school.
As you watch for your forms to arrive, remember to reach out to schedule your tax-filing appointment. An early appointment will help ensure you get all questions answered ahead of the April 17 filing deadline.
Scammers were very successful last year with a scheme to pry W-2 pay stub data away from employers. The IRS warned that it may be one of several techniques they use again this year.
How the W-2 scam works
Fraudsters simply identify employees with access to company payroll data and pretend to be a fellow employee emailing from an outside address. “Hi, I work in accounting. Do you think you could send me the payroll data on file? I’m traveling today and working on preparing my 2017 tax return.”
The IRS said this surprisingly simple tactic worked on more than 200 employers last year and compromised the W-2 information of hundreds of thousands of employees. The stolen data included names, addresses, Social Security numbers, income and withholdings. Scammers then used the data to file returns and claim refunds from the employees’ tax withholdings.
If you’re an employee, it’s hard to defend against this kind of scam because the breach happens to your employer. If you file and get an IRS notice that a return has already been filed in your name, you’ll know you’re a victim.
How to minimize your risk
If your refund was nabbed by a scammer, the good news is that the IRS will still eventually send you a replacement refund. The bad news is it can take a very long time – six months to a year or longer – for the IRS to investigate your case.
If that doesn’t sound appealing, know that there are a few things you can do to minimize your risk:
- File early. By filing early you close the window of opportunity for scammers.
- Request an IRS PIN. This one-time-use number provided by the IRS is entered on your 1040 forms as an added measure of security. Those whose identities have been stolen are automatically placed in the PIN program, but you may also opt-in to it yourself.
- Minimize excess withholdings. If you had your withholdings calculated properly during the year, you can minimize the amount available for scammers to steal. Check your withholdings throughout the year using the IRS web tool. But note that it won’t be available for the 2018 tax year until late February, due to the recently passed Tax Cuts and Jobs Act.
If you have any questions regarding your situation, don’t hesitate to call.
Start your engines! Tax filing season officially begins on Monday, Jan. 29. Not many people file that early, but for some taxpayers it makes sense to do so. Here are common reasons to consider trying to be at the head of the line.
- You’re worried about tax identity fraud. One of the most popular scams by identity thieves is to impersonate someone, file a return on their behalf and snatch their refund check. But once you’ve filed, the window of opportunity for identity thieves closes. If you’ve had problems with your identity being stolen in the past or your information has been compromised, consider filing early.
- You want to avoid a dependent dispute. One of the most common reasons a return is rejected is when you claim a dependent who has already been claimed by someone else. This often happens when there is shared custody of a child.
- Someone needs a completed return from you. If you anticipate buying a house early in 2018 or making any other transaction that will need a tax return as proof of income, you may want to file early so you can provide current tax information. This is especially important if you are self-employed and don’t have pay stubs to use as proof of income.
- You have a complex problem to work out. If you have a complex tax problem to work out, do yourself a favor and get your tax return appointment scheduled early. Otherwise it’s hard to get the detailed attention you need in the rush just ahead of the April 17 deadline.
- You need the refund ASAP. Of course, everyone would like their refund as soon as possible. One thing to remember is that while the IRS starts accepting returns on the 29th, they won’t begin processing paper returns until mid-February. Returns that claim the Earned Income Tax Credit and the Additional Child Tax Credit will see processing of their returns further delayed until some time after Feb. 15. But otherwise, the sooner your tax return is in the queue, the sooner you should receive your refund.
The IRS released new income tax withholding tables that reflect the changes to the tax bracket structure in the Tax Cuts and Jobs Act (TCJA) passed in late December. Employers will have until Feb. 15 to update their payroll systems to reflect the new changes, and employees will start seeing the changes in their paychecks after that point.
The TCJA reduces income tax rates for almost all taxpayers. Widespread tax changes like this seldom happen, so it’s worth keeping an eye on your pay stubs over the next few weeks. The danger is that if the changes aren’t done right, you’ll either have too much tax taken out every paycheck, or end up with a big tax bill because too little was withheld. Here are some tips:
Make sure the changes get done
If you are an employee, you’ll want to ensure that the withholding changes get done by Feb. 15. Most people will see their paychecks increase slightly. If there’s no change or change in the other direction, take a closer look and talk to your employer to find out why. These changes do not require you to file a new Form W-4 if you already have one on file with your employer.
If you are an employer, the IRS said in a notice that all employers “should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15.” The updated withholding tables are available on the IRS website.
Check the withholding calculator
By late February, the IRS said it will update its online withholding calculator tool.
Make a note to check this tool during early March to see whether your paychecks are correct. The tool will ask you to enter information including your income, tax status, and paycheck frequency. The calculator will come up with an estimate of what your paychecks should look like under the new tax laws.
If your tax situation is more complex than the norm, it’s possible that you may end up under-withholding taxes from your paycheck even if things look okay earlier in the year. This is particularly true if you itemize your deductions on your tax return, have multiple jobs or change jobs during the year. If you compare your pay stubs with the withholding calculator again mid-year, that should still give you enough time to correct your situation if things have gone off track.
Sweeping tax law changes almost always trigger corresponding changes to employee withholdings, and the 2018 changes created by the TCJA are no different. If you have any questions regarding your situation, don’t hesitate to call.