Taxes

You may notice several of the following items that may affect your individual income tax return:

• A change in the tax rates which should result in most people paying less tax during the year. However, the increase in the standard deduction, suspension of personal exemptions, an increase in the child tax credit and the limiting or discontinuing certain deductions may have an overall effect on your bottom line.
• Because of the change in rates and the way taxable income is calculated, you may find that if you have unearned income and haven’t made estimated payments, you may owe an estimated tax penalty.
• Changes have occurred to the Standard Deduction. Beginning in 2018, the standard deductions for each filing status has increased. However, the deduction for personal exemptions has been suspended.
• Many changes have been enacted which affect Itemized Deductions. People who have itemized in the past may no longer find it advantageous to do so. Some changes regarding Itemized Deductions are:
  • The deduction for state and local income, sales and property taxes has been modified by a limitation on the deduction to $10,000 ($5,000 if Married Filing Separate). Any amount in excess of $10,000 is not deductible.
  • A deduction for home mortgage and home equity interest has been modified. Interest paid on most home equity loans is no longer deductible unless the loan proceeds were used to buy, build or substantially improve the home.  Further, there is a new dollar limit on total qualified residence loan balances based upon the date the loan was taken, i.e., on or before December 15, 2017 ($1,000,000 cap on deductible interest) or after December 16, 2017 ($750,000 cap on deductible interest).
  • Casualty and theft losses have been modified to allow deductions only to the extent that they are attributable to a federally declared disaster.
  • The deduction for miscellaneous itemized deductions has been suspended. This means that investment management fees, safe deposit box fees, tax preparation fees among other expenses are no longer deductible.
• The Alternative Minimum Tax (AMT) exemption amount has increased.
• Student loans discharged due to death or disability are no longer included in income.
• A traditional IRA, SEP or SIMPLE can no longer be recharacterized in a conversion to a Roth IRA.

If you have questions regarding tax laws, the Interactive Tax Assistant may help to provide answers to a number of questions.  Visit irs.gov for further assistance.

Tax season is upon us and we have begun to receive those pieces of mail marked “Tax Information – Important”.  So now what?  Here are some suggestions to help ease the stress of tax season.

Where do we start?  The best place to start is to find a copy of last year’s return.  Even if you have someone else prepare your returns, it is a good idea to have a copy of last year’s return.  This gives us a guide as to sources of income, whether we may have disposed of assets previously providing income, etc.  Also, it can be a guide as to when you have received all income tax information.

If you can’t find a copy and need a transcript, you can get one by ordering transcripts online Get Transcript Online on IRS.gov; by calling (800) 908-9946; or by mail.

If you have previously received a refund in the past, due to the new tax changes, you may not get a refund or as big a refund as in previous years.  Also if there is a refund on returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit, the refund will not be issued before mid-February. More broadly, precautions instituted by the IRS and its Security Summit partners to combat tax-related identity theft may delay refunds.

The Individual Income Tax Form 1040 has a new look this year.

The current 1040, 1040-A and 1040-EZ are all being replaced by a single, shorter 1040 this year, which can be supplemented by up to six extra schedules.

Those who file their own taxes electronically will need to validate their electronic return with their prior-year AGI, as noted above, or their prior-year Self-Select PIN. (Their AGI would be on Line 37 of last year’s 1040, Line 21 of the 1040-A and Line 4 of the 1040-EZ.)

My final suggestion is that you designate a specific location where you will accumulate all of your tax information until you are ready to deliver to your tax preparer or begin to prepare your taxes.  Keeping information in one place will lessen stress associated with taxes.

Due to the TCJA or recent tax reform, in addition to nearly doubling standard deductions, several itemized deductions that can be claimed on Schedule A, Itemized Deductions have changed.

Many individuals who formerly itemized may now find it more beneficial to take the standard deduction.

Here are some of the changes to Schedule A for 2018:

Deduction for state and local income, sales and property taxes modified
A deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 or $5,000 if married filing separately. Anything above this amount is not deductible.

Deduction for home equity interest modified
Interest paid on most home equity loans is not deductible unless the interest is paid on loan proceeds used to buy, build or substantially improve a main home or second home. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.

Limit for charitable contributions limited on the deduction for charitable contributions of cash has increased from 50 percent to 60 percent of a taxpayer’s adjusted gross income. This means that some taxpayers who make large donations to charity may be able to deduct more of what they give this year.

Deduction for casualty and theft losses modified to only include federally declared disasters.

Miscellaneous itemized deductions exceeding 2 percent of adjusted gross income are no longer deductible.
This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel. It also includes deductions for tax preparation fees and investment expenses, such as investment management fees, safe deposit box fees and investment expenses from pass-through entities.

If you have itemized deductions in the past, you many see a change on your 2018 return.  This can have a huge impact on your overall taxable income and you may not benefit from itemizing deductions as you had in the past.

You have worked hard and have now retired.  You receive pension and/or annuity benefits, have taxes withheld and all is well when you file your income taxes.  True – well, maybe in the past, but perhaps not in the future due to changes to income tax by way of the Tax Cuts and Jobs Act of 2017.

For retirees who receive a monthly pension or annuity check, this may mean changing the amount of federal income tax they have withheld. The easiest way to do that is to use the Withholding Calculator available on the IRS website – www.irs.gov.  This calculator can help you determine if you have had sufficient withholdings from your pension or annuity or IRA.

When using the Calculator, if the taxes are different from the amount being withheld, a new withholding form should be submitted to the payer.  Pension recipients can make a withholding change by filling out Form W-4P, available on IRS.gov, and giving it to their payer.

Because of the limited amount of time left in 2018, some retirees may be unable to adequately cover their expected tax liability through withholding. In that case, another option is to make a quarterly estimated or additional tax payment directly to the IRS.

If you have not yet received your required minimum distribution for 2018, you can still adjust the amount withheld and avoid penalty.

The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments.

Whether or not retirees receive a pension, there’s another option, available to most of them, for paying their income tax liability during the year. They can ask the Social Security Administration to withhold tax on their Social Security benefits. Unlike wages and pensions, withholding on Social Security benefits and other government payments is voluntary and not based on withholding allowances. Instead, beneficiaries can choose to have income tax withheld at one of four flat rates — 7 percent, 10 percent, 12 percent or 22 percent. To request voluntary withholding and for more information, get Form W-4V, available on IRS.gov.

So, as much as we grumble and grouse about paying taxes, imagine how you would feel if you received a notice from the IRS that you were assessed a penalty for underpayment of taxes.

If we are employed as W-2 employees, taxes are routinely withheld from paychecks.  But, that only takes into consideration taxes on your wages, not on additional sources of income such as self-employed earnings or other income, such as interest, dividends, self-employment, capital gains, prizes and awards.

The IRS has launched its Paycheck Checkup campaign to encourage people to check their tax situation, including withholding and estimated tax payments.  This helps taxpayers to determine if they are having enough taxes withheld from their wages.  Some of the highlighted situations that can be affected by the new laws will impact two-income families, if the child tax credit is claimed, if there are dependents age 17 or older, if deductions were itemized in 2017, if there is a high amount of income or the return is complex and if there was a large refund or tax bill for 2017.

Our tax system is one that calculates tax on income as it is received.  For people who receive salaries, wages, pensions, unemployment compensation and the taxable part of Social Security benefits, tax can be withheld.  And, the amount of taxes withheld can be set by the taxpayers.  If taxpayers do not have sufficient taxes withheld, they can make estimated quarterly payments to avoid penalties.

Why is the IRS suggesting taxpayers look at their withholdings?  Well, The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. And, contrary to popular belief, the IRS doesn’t like to assess the penalties to innocent taxpayers.

A tool available on the IRS website – www.irs.gov – called the Withholding Calculator will help taxpayers eliminate or at least reduce any surprises in early 2019 when filing their taxes.  If you find that you have not had sufficient taxes withheld, supply your payroll department with a new Form W-4 to adjust the withholdings.  If you feel it necessary to make an estimated payment, there are guidelines on the IRS website to assist in that regard.

Don’t be surprised in early 2019.  Take action to have the comfort of knowing you have a sufficient credit for taxes paid.

Like most working Americans, when we start a new job, we complete a Form W-4 to direct our payroll withholdings for federal income taxes.  Unless we have a life-changing event such as marriage or children, we don’t give it another thought about our withholdings.  We become complacent with whatever the bottom line is on our income tax returns and life goes on.

However, with the recent enactment of the Tax Cuts and Jobs Act earlier this year, we need to be proactive rather than complacent (and ultimately reactive in early 2019) about our withholdings and what our bottom line will look like for 2018.  The refund you are accustomed to receiving may not be there for 2018.

Some changes to keep in mind:

• No longer are there personal exemptions, rather there is a larger standard deduction based upon filing status.
• There is a cap on the deduction for state and local property, income and/or sales tax if you itemize deductions.
• Certain deductions such as tax preparation expenses unreimbursed business expenses and moving expenses have been eliminated.
• Deduction of interest on home equity loans has been repealed.
• Alimony payments have been affected.

To ensure that you are not faced with an unexpected tax bill, the IRS has provided a calculator on their website (www.irs.gov) called “Paycheck Checkup” which is available to taxpayers to estimate whether adequate withholding amounts are in place.

Don’t be surprised – do a Paycheck Checkup today.

The IRS recommends that taxpayers keep a copy of tax returns for at least three years. Doing so can help taxpayers prepare future tax returns or even assist with amending a prior year’s return. If a taxpayer is unable to locate copies of previous year tax returns, they should check with their software provider or tax preparer first. Tax returns are available from IRS for a fee.

Even though taxpayers may have a copy of their tax return, some taxpayers need a transcript. These are often necessary for a mortgage or college financial aid application.

Here is some information about copies of tax returns and transcripts that can help taxpayers know when and how to get them:

Transcripts

To get a transcript, taxpayers can:

• Order online. They can use the Get Transcript tool on IRS.gov. Users must authenticate their identity with the Secure Access process.
• Order by mail. Taxpayers can use Get Transcript by Mail or call 800-908-9946 to order a tax return transcripts and/or tax account transcripts.
• Complete and send either Form 4506-T or Form 4506T-EZ to the IRS. They should use Form 4506-T to request other tax records, such as a tax account transcript, record of account, wage and income, and a verification of non-filing.

Transcripts are free and available for the current tax year and the past three years. A transcript usually displays most line items from the tax return. This includes marital status, the type of return filed, adjusted gross income and taxable income. It also includes items from any related forms and schedules filed. It doesn’t reflect any changes the taxpayer or the IRS may have made to the original return.

Taxpayers needing a transcript should remember to plan ahead. Delivery times for online and phone orders typically take five to 10 days from the time the IRS receives the request. Taxpayers should allow 30 days to receive a transcript ordered by mail, and 75 days for copies of your tax return.

Copies of tax returns

Taxpayers who need an actual copy of a tax return can get one for the current tax year and as far back as six years. The fee per copy is $50. A taxpayer will complete and mail Form 4506 to request a copy of a tax return. They should mail the request to the appropriate IRS office listed on the form.

First of all, DON’T panic until you read the letter or notice. Every year, the IRS sends millions of notices and letters to taxpayers, and some of them, believe it or not, are benign.

Next, you should IMMEDIATELY forward the letter/notice to your tax preparer.  They are much more accustomed to these notices/letters and can provide guidance as to what must be done, if anything.  What you do not want to do, is keep the letter/notice to yourself.  There may be time constraints that must be complied with and failure to do so could result unfavorably to you.

If you receive a letter, keep the following thoughts in mind:

• If you are requested to send in additional documentation, do so.
• If there is a change in the calculation of tax, compare the information in the notice to your tax return. There may or may not be additional tax due.  Further, you may or may not need to do anything.
• If you find that you might have erroneously omitted something, work to resolve the omission by paying additional tax by responding to the notice. Don’t prolong the outstanding tax as additional penalties and/or interest could apply.
• If you do not agree with the correction made by the IRS, respond as soon as possible with detailed information as to why you disagree. Read the notice for instructions of where to send this information.
• If you have questions, note that there will be a phone number on the letter/notice that can be used to contact the IRS with regard to the matter. When calling, we suggest calling early morning to avoid delays.  Have the notice/letter and a copy of your return in front of you when you call.
• Keep copies of all correspondence from and to the IRS.
• When corresponding by mail, we suggest that you send your correspondence by certified mail as proof of mailing.

If you think that your letter/notice from the IRS is suspicious, call the IRS.  Don’t fall prey to scammers.  And as importantly, watch emails, phone calls and faxes claiming to be from the IRS as they don’t use any of these methods to make the initial contact.  If in doubt, call the IRS about your account.  Protect your identity.

Sadly, the internet has brought new found problems as well as the tremendous benefits proven over the years.  With regard to the IRS, there are everyday challenges to protect taxpayers and their sensitive data.  You’ve heard it before, but the information in this blog bears repeating.

In their attempt to avoid theft of taxpayer information and identity, the IRS offers tips about the phishing scams:

• Remember that the IRS doesn’t ask for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
• The IRS uses the United States Postal Service to initiate taxpayer communications.  They do NOT use e-mail and won’t send a message about your tax account. Should  you receive an e-mail from an address appearing to be the IRS or directing you to an IRS site,

• • DO NOT reply to the message;

• • Do NOT open any attachments as they may contain malicious code that will infect your computer;

• • Do not click on any links in the email. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term ‘identity theft’ for more information and resources to help.

• If you receive an email from the IRS, look at the ending of the address.  If it ends in .com, .net, .org or other designations instead of .gov, then it is not from the IRS.  The address of the official IRS website is http://www.irs.gov.
• If you think you find a website that claims to be the IRS but are suspicious, do NOT provide any personal information and report the site to the IRS.
• If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you are not certain of the authenticity, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you.

If you receive the IRS phone scam or any IRS impersonation scam, you should report it to the Treasury Inspector General for Tax Administration at its IRS Impersonation Scam Reporting site and to the IRS by emailing phishing@irs.gov with the subject line “IRS Phone Scam”.