Tax filing season has officially begun. Not many people file this early, but for some taxpayers it makes sense to do so. Here are some reasons you might consider trying to be at the head of the line:
You’re worried about tax identity fraud. One of the most common 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 particularly 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 sometime after Feb. 15. But absent those exceptions, the sooner your tax return is in the queue, the sooner you should receive your refund.
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.
Congress has passed tax reform that will take effect in 2018, ushering in some of the most significant tax changes in three decades. Here are some of the most important items in the new bill that impact individual taxpayers.
Individual Rule Changes
Because major tax reform like this is so rare, it's worth scheduling a tax planning consultation to ensure you get the most tax savings possible during 2018. Click here to contact Ellsworth & Associates and set up an appointment.
Inheriting a retirement account like a 401(k) or an IRA is more complicated tax-wise than if you’d been left a house or a set of golf clubs. Here are some tips on how to use a “stretch out” to avoid being hit with a big tax bill.
Stretching It Out
A stretch out is a plan to start taking small distributions from an inherited retirement account over a period of time. It allows a person who inherits a retirement account to avoid paying income tax on the entire amount right away. Taxpayers also benefit by keeping the account as a tax-advantaged investment vehicle that can grow over time.
Example: Dee Lee Beloved, 30 years old, inherits a $1 million IRA from her deceased uncle. If she were to take the whole amount in a lump sum, she would move into a higher tax bracket and pay 39.6 percent tax on most of her inheritance. Instead, she opts to stretch-out the IRA distributions over the next several decades, based on IRS life expectancy tables for her age. She thus receives smaller, more tax-efficient regular payments each year. She invests the balance of the account in mutual funds and hopes its value will grow over time.
Choose from Two Options
The IRS requires you to take full disbursement of an inherited retirement account within five years, unless you create a formal stretch-out plan to take small regular payments over an extended period. This gives you two stretch-out options:
Extra Option for Spouses
When spouses inherit retirement accounts, they are allowed to treat it as if it were theirs originally. That means they can continue making tax-advantaged contributions and can start withdrawing funds after reaching retirement age.
But younger spouses may want to consider converting accounts to stretch outs anyway. That’s because you can start taking distributions immediately, instead of waiting until age 59 ½ to withdraw funds penalty-free.
Stretch outs can be complicated, and some inherited accounts have special rules limiting the use of stretch outs. The best bet is to get professional assistance to help you create an optimal tax strategy when you receive an inheritance.
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.
For most taxpayers, Dec. 31 is the last day to take actions that will impact their 2017 tax returns. For example, charitable contributions are deductible in the year made.
Donations charged to a credit card before the end of 2017 count for the 2017 tax year, even if the bill isn’t paid until 2018. Checks to a charity count for 2017 if they are mailed by the last day of the year.
Required Minimum Distributions
Taxpayers who are over age 70 ½ are generally required to receive payments from their individual retirement accounts and workplace retirement plans by the end of 2017, though a special rule allows those who reached 70 ½ in 2017 to wait until April 1, 2018, to receive them.
Workplace Retirement Accounts
Most workplace retirement account contributions should be made by the end of the year, but taxpayers can make 2017 IRA contributions until April 17, 2018. For 2018, the limit for a 401(k) is $18,500. For traditional and Roth IRAs, the limit is $6,500 if age 50 or older and up to $15,500 for a Simple IRA for age 50 or older. Check irs.gov for more information about cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2018.
Prepare Now to File Your Taxes
Taxpayers should be careful not to count on getting a refund by a certain date, especially when making major purchases or paying other financial obligations. Taxpayers can take steps now to make sure the IRS can process their return next year.
Taxpayers who have moved should tell the US Postal Service, employers, and the IRS. To notify the IRS, mail IRS Form 8822, Change of Address, to the address listed on the form’s instructions. For taxpayers who buy health insurance through the Health Insurance Marketplace, they should also notify the Marketplace when they move out of the area covered by their current Marketplace plan.
For name changes due to marriage or divorce, notify the Social Security Administration so the new name will match IRS and SSA records. Also notify the SSA if a dependent’s name changed. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of a return and may even delay a refund.
Some Individual Taxpayer Identification Numbers must be renewed. Any Individual Taxpayer Identification Number not used on a tax return at least once in the past three years will expire on December 31, 2017. Additionally, all ITINs issued before 2013 with middle digits of 70, 71, 72 or 80 (Example: 9XX-70-XXXX) will also expire at the end of the year. As a reminder, ITINs with middle digits 78 and 79 that expired in 2016 can also be renewed. Only taxpayers who need to file a U.S. federal tax return or are claiming a refund in 2018 must renew their expired ITINs. Affected ITIN holders can avoid delays by starting the renewal process now.
Those who fail to renew before filing a return could face a delayed refund and may be ineligible for some important tax credits. More information about ITINs, including answers to frequently asked questions is available on the IRS website.
Keep Old Tax Returns
Keeping copies of tax returns is important. Taxpayers may need a copy of their 2016 tax return to make it easier to fill out a 2017 tax return. Some taxpayers using a software product for the first time may need to provide their 2016 Adjusted Gross Income, or AGI, to e-file their 2017 tax return.
Taxpayers who do not have a copy of their 2016 return and are existing users can log in to their online IRS account if they need their AGI. Otherwise the IRS will mail a Tax Return Transcript if requested online or by calling 800-908-9946. Plan ahead. Allow five to 10 days for delivery.
Save More in 2018: Retirement Contribution and Social Security Limits on the Rise
The maximum contribution to 401(k) accounts is being raised by $500 in 2018, the first increase in three years. If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2018.
Retirement Contribution Limits
Don't forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.
Both the House and Senate have passed versions of a tax reform bill. If a combined bill is passed and signed into law, it creates a unique window of possible tax savings during the last few weeks of 2017. But only if you prepare to act. Here are some tips.
4 Last-Minute Tax Moves to Make in 2017
1. Leverage less-valuable state and property deductions. The new bills reduce and potentially eliminate the ability to take state taxes and property taxes as an itemized deduction.
What to do now. Consider making next year’s initial estimated tax payment before the end of 2017. Do the same thing with property tax payments. As long as you are not subject to the alternative minimum tax (AMT), this is a one-time opportunity to get this tax benefit before it is reduced or eliminated.
2. Some itemized deductions are worth more this year. The tax law changes mean itemized deductions will be worth more to you this year than next.
What to do now. Charitable contributions may be more valuable this year because they may offset income taxed at a much higher rate than it will be next year. The same may be true of mortgage interest and medical expense deductions that may be reduced or eliminated next year.
3. New tax rates and income brackets complicate matters. With different income tax rates and income brackets, it will be very difficult to get your withholdings estimated correctly.
What to do now. Create a quick tax estimate based on your 2017 information before the end of the year. See if it makes sense to change your withholdings.
4. Lower small business taxes next year provide a unique opportunity. The tax rates on most businesses from C corporations to flow-through entities like S corporations and LLCs will be lower beginning next year with the passage of new legislation.
What to do now. Deductions will be worth more to you in the 2017 tax year than next year, when income will be taxed at a lower rate.
If everything goes smoothly, new tax legislation will be signed into law in late December. This timing will give you very little time to act, so now is the time to prepare. The nimble taxpayer may have the opportunity make some tax-efficient moves in the waning days of 2017.
There are a lot of new things to get used to when you change jobs, from new responsibilities to adjusting to a new company culture. One thing you may not have considered are the tax issues created when you change jobs. Here are tips to reduce any potential tax problems related to making a job change this coming year.
5 Tax Tips for Job Changers
Finding a new job can be an exciting experience, and one that can create tax consequences if not handled correctly. Feel free to call Ellsworth & Associates to discuss your individual situation.