This year presented numerous changes to the tax preparation and planning process for both individuals and businesses. As we reflect on this past tax season and the conversations we had with clients, the following are a few areas where multiple people asked for clarification. They are explained here just in case you have the same questions.
As you think about your 2019 taxes, make sure you:
1. Understand Your Tax Obligation
In a perfect world, you will not owe any tax at the end of the year nor be owed a refund. However, it’s nearly impossible to plan your tax obligation down to the penny, which is why you will either owe or receive a refund. Life changes like a change in jobs, a significant raise or bonus, getting married and having a child, to name a few, will change the taxes you owe. Add to that changes in tax law, like the recent Tax Cuts and Jobs Act (TCJA), which made significant changes to deductions and things you were able to deduct in prior years are now a thing of the past.
2. Realize Changes Made to Itemization.
Thanks to the TCJA, the standard deduction doubled. That means many people who itemized in the past will no longer itemize since the standard deduction is larger than the itemized amount. It still makes sense for you to keep receipts for things like charitable contributions and medical expenses so your taxes can be calculated with and without them to see what results in the fewest taxes owed.
Even if you take the standard deduction, there are still “above the line deductions” you can take. These are deducted directly from your gross income and are available even if you can’t itemize.
3. Pay Your Estimated Taxes Timely.
If you don’t pay any, or a minimum percentage, of your total estimated tax obligation to the government through payroll deduction, then you are obligated to write the government a check for your estimated taxes. This especially applies to business owners whose business income is reported on their personal income tax returns. To help you comply with the law, your tax preparer should provide you with vouchers for each quarter to use to submit your estimated tax payment. Don’t ignore these vouchers! Put reminders in place to pay them timely to avoid any unnecessary penalties.
4. Plan for the Year Ahead.
Adjusting your withholdings now is the easiest way to manage a large tax payment due come April 15. In early 2018, the IRS issued new wage withholding tables and instructed employers to begin using them right away. The withholding amounts are designed to only take out what is needed to meet your tax obligation, not to fund a large refund many Americans have become accustomed to. This presented a lot of confusion to taxpayers who didn’t receive the refunds they were anticipating and, perhaps, even owed Uncle Sam. To address that, the IRS is currently updating its W-4 (Employee’s Withholding Allowance Certificate) and will release a final version in November. You don’t have to wait to make adjustments though. If you aren’t sure what to put on our current W-4, consult your tax preparer.
5. Reap the Benefits of a Quarterly Accounting Review.
Some business owners wait until the end of the year to think about taxes. At that time, they send accounting records to their accountant, who has a significant amount of cleanup work to do to get the books ready for tax prep. A better solution is to have your books reviewed quarterly so you are able to answer questions about expense classifications while they are still fresh in your mind. All you need to do is to send your tax preparer your balance sheet and income statement along with a list of any major acquisitions or dispositions quarterly. Once everything is reviewed and reclassified, as needed, your taxable income can be more accurately predicted, meaning no surprises at tax time. It’s a simple way to make your life easier.
Tax laws change all the time, and they can be quite confusing. The TCJA itself has changed the playing field and many people are still trying to navigate the new landscape. If you are ever in doubt about anything tax-related, you should reach out to your tax preparer for advice. Doing so sooner rather than later will make your year-end gathering of receipts and documentation a smoother process, ensuring you pay only the taxes you are legally required to pay.