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One of the most common discussions I have with clients is regarding itemized deductions. In last weeks blog I explained itemized deductions, but I wanted to explain the difference in a little more detail. I find that so many clients who previously used online software to self-prepare have no clue they actually were using the standard deduction and not itemizing.
As we discussed in my last blog, on each tax return you either get the standard deduction or itemized deductions. First, let me explain the standard deduction.
The standard deduction is just as the name implies, standard. Every single taxpayer is eligible for this deduction (Gets a little tricky on married filing separately, but that's a conversation for a different day). How much the standard deduction is depends on filing status. Single or married filing separately filers receive a standard deduction of $12,000 under the new tax law. Head of house hold filers (one taxpayer and at least one dependent) receive a standard deduction of $18,000. And married filing joint return filers receive a standard deduction of $24,000. The standard deduction automatically lowers your taxable income. For example, a single woman making $50,000 on her W2 would only pay taxes on $38,000 of her income without having any other deductions.
If a taxpayer or taxpayers have itemized deductions (allowable medical expenses, state tax, real estate and property tax, mortgage interest, mortgage insurance, and charitable contributions) totaling MORE THAN their filing status's standard deduction, then that taxpayer can itemize and get a deduction larger than a taxpayer who doesn't reach that limit. This means, from our previous example, if the single woman making $50,000 had itemized deductions totaling $12,005, she would pay tax on $37,995 of her income before taking into consideration any other eligible deductions.
As you can see from these examples, it takes a lot of itemized deductions to achieve a total larger than your standard deduction. Especially for 2018 tax year filings, as the standard deduction amounts were doubled. A lot of taxpayers I sit down with believe they have itemized for many years because their online software has them enter all this information, however, when we actually look at the numbers.....they were using the standard deduction all along. This is why I feel it is SO important to work with a tax professional so you can actually understand how your tax refund or bill amount was achieved.
If you have any questions, comments, or to set up a tax consultation, please send me a message or call my office at 314-450-1140.
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One of the first things people ask me when they hear I am an accountant is "Can I write ___ off?". As with most areas of tax code and accounting, the answer is often more complex than the average person is actually interested in learning. In this blog, I'm going to focus on personal tax deductions or Schedule A itemized deductions. Next week we'll dig deeper into small business deductions!
New this year, the standard deduction for single or married filing separate was doubled to $12,000 and married to $24,000. I think most people know this information by now. So now the next question is, "what do I have to do to itemize?"
Medical Expense Write-Off:
Whether or not you can write off medical expenses depends on a lot of factors. The first of which being, did your medical expenses total MORE THAN 7.5% of your adjusted gross income. For most people, this stipulation knocks them out of contention almost immediately. For an example, for an average person making $50,000/year you'd have to have $3,750 in medical expenses, and even THEN it's only the amount OVER $3,750 that can be included in your itemized deductions. That means for this example, if you had $3,850 in medical expenses for the year, you could add $100 to your itemized deductions. You'll also note that I said ADD this amount to your itemized deductions. If you don't reach the amount necessary to itemize in total deductions ($12,000/$24,000) medical deductions will make no difference regardless.
State & Local Taxes Write-Off:
State & Local taxes paid can be itemized up to $10,000 or $5,000 if single (previously was unlimited). This new stipulation of up to $10,000 is definitely impacting how many Americans can itemize this year. State and local taxes include: state taxes paid, local taxes paid (STL City for example), real estate taxes paid, and personal property taxes paid. Now, if you have relatively high income and high real estate taxes you will likely be capped on this section of itemized deductions.
Mortgage Interest Paid:
Mortgage interest is pretty self-explanatory. You receive a 1098 mortgage interest statement and the interest on that statement is an itemized deduction. Again, assuming you have enough in itemized deductions to exceed the standard deduction. Certain taxpayers can also get a small amount of itemized deduction for mortgage insurance as well.
Charitable contributions are included in itemized deductions as well. When you make a cash donation, you should receive a receipt for the amount of the deduction. Things like golf tournaments and dinners will include on that receipt the portion that was deductible (you can't deduct the $200 you paid for the golf tournament, because $100 was for playing golf so only $100 is deductible.) Additionally, there are deductions for clothing, furniture, etc. When you make a non-cash donation it is important to get a receipt and accurately report the items donated and amount you could receive for an item if sold at a thrift shop. (For example, that $10 shirt you got from Old Navy 15 years ago doesn't count for a $50 charitable donation deduction) These types of deductions can be a little hairy as a lot is left up to interpretation so it is best to err on the side of caution.
Assuming you made it this far, the most important thing to remember is that all of the above items have to equal MORE THAN your standard deduction for your filing status to see any benefit from these deductions. Prior to 2018 tax year I would say roughly 50% of my clients benefited from itemized deductions. With the new tax law, I have yet to have one client reach enough in itemized deductions to surpass the standard deduction. A lot of people get tricked, for lack of a better word, by Turbo Tax into thinking they are seeing a benefit from their $100 donation to the charity of their choice because Turbo Tax has their clients enter all of this information with no explanation of how it works. If you're interested in having a better understanding of your taxes, please set up an appointment with me today!
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Perhaps the second most asked question I receive as a tax preparer is "When will I get my refund?" This is a close second only to, "How much is this going to cost me?" The best answer to this question is to check the IRS tax refund website here. On this page you will need to know your exact refund amount, filing status, and social security number.
Now, the short answer to this question is, within 21 days of filing if receiving refund direct deposit and 21-30 days if receiving refund by check. That being said, this year, most refunds that do not include EIC have been receiving their refunds in 10-12 days direct deposit. It is, of course, unclear if this will continue as the season continues, so we suggest to get your taxes filed as soon as possible if you would like your refund quickly.
If it has been 21 days since filing and there is no update on the IRS "Where's my refund" page, this likely means there is a problem with your return. Do not panic, this can be any number of things, and is usually easily fixable.
If you need to get your taxes filed in St. Louis we are happy to help at STL Bookkeeping & Tax. Additionally, if you've received a dreaded letter from the IRS that there is a problem with a return you have filed, give us a call at 314-450-1140 and we'd be happy to discuss your options!
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At this point, a lot of people in St. Louis have begun to receive their tax refunds and are comparing refunds with their friends, families, and co-workers. The first thing I want to say is, you CAN NOT compare your tax refund/bill to anyone else unless you have the EXACT SAME dependents, income, filing status, state taxes, dependent care, etc. Seeing as how that is extremely unlikely, the point is: do not compare!
That being said, if you got a smaller or larger refund this year, you may not totally understand why. One thing that people may not be fully understanding is the tax tables changed last year for the first time since the early 80's along with the largest tax overhaul in decades. These two changes at the same time can leave anyone confused! When the tax tables changed, if you claimed 1 (one) on your W4 for as long as you've been a working person, claiming 1 no longer meant the same withholding in 2018. For a quick example, for every $1,000 you made in 2017, you had $100 withheld in taxes. In 2018, for every $1,000 you made, still claiming 1, only $90.00 was withheld. (these figures are all made up for explanation purposes, and should not be used to make any tax decisions) Because of this, you saw extra money on each check (on average $20-$50), but that now means that your refund is smaller. It is important to note, that may not mean your total tax BILL (the total amount of taxes you paid in 2018) was larger. If you're not sure what you paid in total taxes in 2017 as compared to 2018, this would be a great question for your tax professional to see if the new tax plan actually helped or hurt you from a tax perspective. Your refund amount is not necessarily a good indicator of the big picture.
If you don't have a tax preparer/planner in the St. Louis or St. Charles area, I would love the opportunity to look over your taxes for you and let you know where you stand. I may even find deductions that you missed when preparing taxes yourself! Please call or text me, Michelle Walsh at 314-450-1140 and I'd be happy to take a look for you. If I find an opportunity for larger tax savings, we can set up a time for you to come in and amend the return you filed.