Auburn University professor Kimberly Key provides advice on tax laws and changes that might affect individuals and businesses for this year and next. She is PWC Professor of Accounting in Auburn University’s Harbert College of Business.
Are there any changes to the tax code that we should be aware of, or might impact our returns?
The Tax Cuts and Jobs Act of 2017 made substantial changes to tax rates and to the tax base for individuals and businesses. We are now in the second filing season since those changes.
The good news is that there are almost no law changes between 2018 and 2019. However, individuals, business owners and tax preparers are still learning about the most complicated changes, and the IRS issued guidance throughout 2018. Some of the guidance could result in amended 2018 tax returns, but overall, the tax-filing season for 2019 tax returns should be smoother.
There is one interesting and widely applicable change: the new Form W-4. This is not a change in tax law, but rather a change in the calculation of federal income tax withholding from employee paychecks. When 2018 tax returns were filed, there were more surprises than usual about the amount due to the IRS or refund due to the taxpayer.
The old Form W-4 does not “fit” the new tax law well. Employees do not have to complete a new form for their employers, but it is worth considering. The new form is less complex and has straightforward questions, and thus should result in accurate withholding.
Should we expect any surprises?
There shouldn’t be many surprises this year if someone’s tax situation is the same as last year. This can include income and deductions, of course, but family changes can affect taxes too. A new baby, a child who graduates and starts working, marriage, divorce and a death of a spouse are a few examples of life changes that affect taxes, too.
Business owners (except for corporations) should be working with their tax advisers to plan for and maximize the qualified business income deduction. The deduction is available to a wide range of businesses, including some real estate activities.
A simple tax strategy for individuals who itemize their deductions is to “bunch” deductions in one year and take the standard deduction in the next year. An example is to make two years of charitable contributions in one year. It’s too late to plan for 2019 tax returns, but it’s early enough in 2020 to consider this strategy.
Any automatic payments would have to be changed, and if someone writes a big check to a church, for example, it might be worth telling the treasurer that it’s a prepayment … so the church knows not to expect any donations the following year.
Anyone who has an employer-sponsored retirement plan or who can use an individual retirement account should review the plan options. It’s generally good advice to tell someone to try to increase the amount he or she is contributing to the plan. Try it. Increase it by 1 percent, see that it wasn’t too painful, and do it again in a few months.
It is important year in and year to out to maintain good records. It’s easier to do record keeping throughout the year rather than searching for and through records that are several months old. Keep a current-tax-year folder, and drop in receipts for items like car tags (property tax portion is deductible for an itemizer).
As 1099s start arriving in the mail, put all of them in the same tax folder. If a family is taking withdrawals from a college savings account, a 529 plan, make sure to have good records of education costs incurred. It’s a lot harder to do these calculations several months or more than a year later if an IRS notice arrives in the mail.
What are common mistakes the average taxpayer makes when they file their taxes?
It’s important to have correct details like Social Security numbers and birth dates; both of these affect timeliness of refunds and potentially some tax benefits like the child credit, which depends on the age of the child.
It is also important to realize that the state has different rules, thresholds and allowable deductions than federal. Someone might think, “Why bother to keep these donation receipts?” thinking that he or she will take the federal standard deduction. The state standard deduction is much lower than federal, so many people itemize on their Alabama tax returns.
If using software, enter all the numbers from a W-2. Don’t skip the Social Security withholding boxes because those taxes are itemized for Alabama. Another example is that contributions to an Alabama college savings plan are deductible for the state. The plan won’t send a form; the taxpayer must remember to take the deduction or tell the tax preparer about it.
Is it important to file early, or does it matter?
Filing early is not necessarily advantageous except that the earlier someone files a 1040, the earlier any refund will be received. The IRS seems to process refunds fairly quickly.
If someone has an amount due, there is no rush to file early … but there’s also no reason to go right up to April 15 — it’s too stressful to wait and too easy to forget that the deadline has arrived. It is important to be organized and ready to file as soon after year-end as possible because it’s easier to keep up with the information documents in early February than in early April.
Do you recommend taxpayers hire professionals to file taxes for them?
There are good, free tax preparation services available to lower-income taxpayers and some senior citizens. Auburn University students serve as the main volunteer pool for SaveFirst, for example, and AARP has a tax-aid program.
Someone who has a business should use a reputable CPA. For individuals, there are plenty of February-to-April tax preparation businesses. Taxpayers should exercise judgment about using any service (tax, car detailer, etc.), but taxpayers are especially vulnerable in using tax services because comparative shopping is difficult for a once-a-year service. “How much will I be charged?” is a reasonable question.
No matter which tax preparation service someone uses, it’s probably a bad financial decision to take an advance on the refund from the preparer. The fees are high when the only benefit is accelerating a refund by a few weeks. Be patient, and wait for the IRS to issue the full refund.