Paycheck Withholding is Changing
New Withholding Tables
In the Tax Cuts and Jobs Act (TCJA) passed in late December, the IRS released new income tax withholding tables that reflect the changes to the tax bracket structure. Employers will have until February 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 nearly all taxpayers. Extensive tax changes like this rarely 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 large tax bill because too little was withheld. Here are some tips:
Make Sure the Changes Are Made
If you are an employee, you’ll want to ensure that the withholding changes are completed by February 15. Most people will see their paychecks increase slightly. If there’s no change, or if your paycheck decreases, 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
The IRS has said it will update its online withholding calculator tool by late February. 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 generate 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 correct 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.
Getting audited by the IRS is no fun. Some taxpayers are selected for random audits every year, but the chances of that happening to you are very small. You are much more likely to fall under the IRS's gaze if you make one of several common mistakes. That means your best chance of avoiding an audit is by doing things to prepare right before you file your return this year. Here are some suggestions:
Don't leave anything out. Missing or incomplete information on your return will trigger an audit letter automatically, since the IRS gets copies of the same tax forms (such as W-2s and 1099s) that you do.
Double-check your numbers. Bad math will get you audited. People often make calculation errors when they do their returns, especially if they do them without assistance. In 2016, the IRS sent out more than 1.6 million examination letters correcting math errors. The most frequent errors occurred in people's calculation of their amount of tax due, as well as the number of exemptions and deductions they claimed.
Don't stand out. The IRS takes a closer look at business expenses, charitable donations and high-value itemized deductions. IRS computers reference statistical data on which amounts of these items are typical for various professions and income levels. If what you are claiming is significantly different from what is typical, it may be flagged for review.
Have your documentation in order. Be meticulous about your recordkeeping. Items that will support the tax breaks you take include: cancelled checks, receipts, credit card and investment statements, logs for mileage and business meals and proof of charitable donations. With proper documentation, a correspondence letter from the IRS inquiring about a particular deduction can be quickly resolved before it turns into a full-blown audit.
Remember, the average person has a less than one percent chance of being audited. If you prepare now, you can narrow your audit chances even further and rest easy after you've filed.
Choosing a Tax Return Preparer
As the tax filing season approaches, it's time to start thinking about who will prepare your state and federal tax returns.
In 2017, more than 132 million individual and family tax returns were e-filed, the most accurate, safest, and easiest way to file. More than 16 million were prepared on a computer and printed or prepared by hand, then mailed.
The IRS stresses that no matter who prepares a federal tax return, by signing the return, the taxpayer becomes legally responsible for the accuracy of all information included.
Many taxpayers pay for tax return preparation. By law, all paid tax preparers must have a Preparer Tax Identification Number, or PTIN. Paid preparers must sign the return and include their PTIN. The IRS offers tips to help taxpayers choose a tax return preparer wisely. The Choosing a Tax Professional page has information about tax preparer credentials and qualifications. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help identify many preparers by type of credential or qualification.
Taxpayers who use paid preparers should still keep copies of their most recent tax returns for their own records. If using a software product for the first time, you may need your adjusted gross income amount from your prior-year return to verify your identity.
Always avoid fly-by-night preparers who may not be available after the due date or who base their fees on a percentage of the refund.
Tax Returns Due April 17 This Year
The Internal Revenue Service announced yesterday that it will begin accepting tax returns on Monday, Jan. 29, 2018. Nearly 155 million individual tax returns are expected to be filed in 2018. The nation’s tax deadline will be April 17 this year – so taxpayers will have two additional days to file beyond April 15.
Many software companies and tax professionals will be accepting tax returns before Jan. 29 and then will submit the returns when IRS systems open. Although the IRS will begin accepting both electronic and paper tax returns Jan. 29, paper returns will begin processing later in mid-February as system updates continue. The IRS strongly encourages people to file their tax returns electronically for faster refunds.
The IRS set the Jan. 29 opening date to ensure the security and readiness of key tax processing systems in advance of the opening and to assess the potential impact of tax legislation on 2017 tax returns.
A tax reform bill known as the Tax Cuts and Jobs Act was passed by Congress recently and was signed into law by President Trump on December 22. Most of the new laws are relevant to the 2018 and 2019 tax years, but there are a couple items that you need to know about right away for your 2017 taxes.
1. The medical expense deduction threshold was retroactively lowered to 7.5 percent.
The tax reform bill retroactively lowers the threshold to deduct medical expenses in 2017 to 7.5 percent of adjusted gross income. The previous threshold was 10 percent. This new 7.5 percent threshold remains in place for 2017 and 2018, but reverts back to 10 percent in the following years.
What this means. If you were not planning on using the medical expense deduction this year because you fell short of the 10 percent threshold, you may want to reconsider your situation before year end. If there are any qualified medical expenses you can make (drug purchases, medical equipment, etc.) before Dec. 31 to push you over the new, lower threshold, consider doing so. But you must act now.
2. The healthcare individual mandate penalty stays in place until 2019.
The individual mandate (also known as the shared responsibility penalty) in the Affordable Care Act is effectively repealed by the tax reform legislation, but not right away. The penalty is set to zero in 2019, but remains in place for 2017 and 2018.
What this means. You still need to retain your Form 1095s this year and next in order to provide evidence of your healthcare coverage. Without proof of coverage, you may have to pay the higher of $695 or 2.5 percent of income. Unless there are further changes coming, 2018 may be the last year you'll need to worry about the individual mandate penalty.
More Changes to Consider for 2018 Tax Planning
We're experiencing one of most significant tax law changes in more than 30 years. There will be a lot of things to consider for 2018 tax planning. Here are some of the most significant:
The IRS recently announced mileage rates to be used for travel in 2018. The business mileage rate increases by one cent. The medical and moving mileage rates are also raised by one cent. Charitable mileage rates are unchanged.
New Mileage Rates for 2018
Remember to properly document your mileage to receive full credit for your miles driven.
The IRS recently announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2018. The rates will be:
Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. For individual taxpayers, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
Credit Card Transactions Could Pose Audit Risk: What Small Businesses Need to Know
Small business owners beware: the IRS may more closely scrutinize reporting of credit card transactions after it was criticized for lax enforcement.
The IRS' overseer, the Treasury Inspector General for Tax Administration (TIGTA), recently said the IRS had been missing opportunities to audit tax returns that had large discrepancies between income and the card payments reported on Forms 1099-K.
This means small businesses that accept credit, debit, or gift card payments can expect to draw the attention of IRS auditors if there are material differences between what is reported on their tax returns and what is on their 1099-Ks.
Tax Gap Concern Driving the Scrutiny
TIGTA has estimated an underpayment of more than $450 billion in income taxes every year. In an effort to close this "tax gap," it recommended the IRS focus on some of the larger or more obvious sources of underpayment.
One area TIGTA identified was on Forms 1099-K, where more than 20,000 taxpayers who received them had discrepancies of more than $10,000 on their returns. Calculating from this small sample size, there was at least a $200 million underpayment.
Who Is Impacted
If you have a business that accepts payment cards like debit cards or credit cards, you will probably receive a Form 1099-K from your payment processor. The form is also required for anyone who has $20,000 in card payments and 200 transactions or more per year. Examples of those who would receive Forms 1099-K include users of PayPal, sellers on Ebay and Etsy, cab drivers and any small business that accepts card transactions as a form of payment.
Here's How You Can Prepare
Receiving a Form 1099-K and reporting it in such a way that the IRS is satisfied can be complicated. You could easily double-report your revenue from 1099-Ks out of an excess of caution. Or, you may not be disclosing your correct reporting of card income in a way that IRS audit programs are able to identify. It's often best to get professional guidance to ensure your return does not stick out when the IRS tries to comply with the TIGTA request for more oversight.
The IRS recently announced important figures for 2018, using figures based on the Consumer Price Index published by the Department of Labor. Use these early figures to start developing your tax strategies for next year.
Tax Brackets: There are currently seven tax brackets ranging from 0 percent to 39.6 percent. Each of the income brackets rose between 1.9 and 2.1 percent.
Personal Exemption: $4,150 in 2018 (up $100 from 2017)
Other Key Figures:
Remember: These early IRS figures are prior to any potential tax law changes currently under consideration in Washington D.C.
Seeing Inside the Mind of the IRS
While most of us are never audited, when it happens we can feel like a lamb thrown in a room with a lion. The IRS auditor does these audits every day. They know what to look for, and may ask leading questions that are easy to answer incorrectly. Here are some tips to help you when you are in the crosshairs of an IRS audit.
Timely Address IRS Correspondence
Do not let any issues raised in an IRS correspondence letter get to a point where a face-to-face examination is required.
Ask for Help
Do this right away. Too many clients think the problem is easy to resolve, but inadvertently say the wrong thing, resulting in another audit issue.
Understand What's Being Asked
Clearly understanding the core question behind the audit can simplify the solution. Why is the IRS asking to see your 1099s? Do they have a form that you do not? Why are they asking about your small business profits? Are they thinking your business is a hobby?
See the Audit through the Eyes of IRS Auditor
The IRS focuses auditor training on several areas. These are published in Audit Techniques Guides (ATGs) and are available for review on their web site at irs.gov (search for "Audit Techniques Guides" in the search bar). They are invaluable in identifying areas for potential audits, and can help you understand what the IRS likes to question. While most of the ATGs deal with business taxation, reviewing the topics can be useful in understanding where audit risks are and what you can do to prepare yourself in case of an audit.
Common ATG Topics
If you have business activity that touches any of these topics, it makes sense to understand how an IRS auditor is trained. By reviewing the specific ATG you will know the process of the IRS audit and gain some insight into how the audit will go.