GMR 60: Taxes and Filing, What You Need to Know

Episode 60
As Americans we have the privilege of living in a country where we experience freedom and incredible opportunities, but it doesn’t come without a cost. In this episode of Getting Money Right we’re talking taxes. We’ll talk about why taxes are important and prepare you to make some important decisions as you prepare to file your taxes for last year and plan for this year.

SHOW NOTES

Taxes we don’t usually notice:

• Sales Tax

• Airline Transportation Hotel Tax

• Library Taxes

• Building Permits

• Fishing & Hunting Licenses

• Vehicle Registration Taxes

• Vehicles Sales Tax

• Driver’s License Fees

• Sin Taxes - Sugar, Cigarettes, Liquor

• Gift Taxes

• Estate Taxes

• Toll Roads

• State Income

• Federal Income

• Unemployment Taxes

Grateful for the opportunity to pay taxes…

• Over 50% of people don’t pay any taxes….

• 75% of American filers in 2017 received a tax refund, which is like giving the government an interest free loan.

Should you file your own return or hire a tax pro?

The tax filing dilemma

• You want to get the most deductions and tax credits so you can get the biggest refund.  

• Tax filing software is less expensive than hiring a professional, and there's also some free filing options if you file online.

• But, can they guarantee you get back every dollar you deserve? More importantly, will they keep you safe from mistakes that may trigger an audit?

• I (Leo) didn’t want to pay for something I knew I could do on my own. It turns out I’m not alone.  

In 2017, 55% of the returns filed were done without the help of a tax preparer.  

There are people that can and should file their own tax returns, just as there are people who should always hire a professional.  Don’t try to save $200 to $300 and end up in trouble with the IRS, or worse, pay more taxes than you should. The key is to know when it’s time to hire a professional and when you should do it yourself.  Hopefully, the following guideline will help.

IF ALL OF THE FOLLOWING APPLY TO YOU, YOU CAN FILE YOUR OWN TAX RETURN

• You have basic understanding about tax returns or are willing to learn so you feel confident you’re doing it right.

• You have the time and the patience to do it yourself.

• You have a simple tax situation, unchanged from the previous year.

  • Sample situation that is simple: You’re single or a married couple who rent an apartment, have no dependents, no significant assets, no business, and made no significant charitable contributions.

• You’re comfortable with using technology to assist you in filing your taxes or preparing by hand.

For those making less than $66,000, you can use IRS Free File to file your return electronically at no cost to you.

IF ANY OF THE FOLLOWING APPLY TO YOU, YOU SHOULD HIRE A PROFESSIONAL TAX PREPARER

• You don’t have a basic understanding of tax returns and are overwhelmed by the notion of filing one.

• You don’t have the time or patience to do it - the average time to file a tax return for those who itemize deductions is 16 hours.

• You have dependents, real estate property, investment income, you've made charitable contributions, or own a business.

• You are not able or willing to represent yourself in case of errors or an audit by the IRS.

The first year I (Leo) hired a tax professional to file my return he saved me $800. I was glad I spent the $250 to hire him. Of course, not all tax professionals are created equal.  Like in any profession, you have the good and the not so good.  Make sure your tax preparer is licensed and verified. You may need to interview several to find one that you like and will serve you best.  Let me share my personal 3 Must Do’s for a tax professional.

3 MUST DO’S FOR A TAX PROFESSIONAL

1. PROVIDE MORE THAN TAX RETURN FILING

A good tax professional will not only file your return but sit down with you and help you plan for the future. She will help you plan for income and expenses that will maximize your deductions and reduce your taxes legally, so you can keep more of your income and use it to increase your financial well-being.

2. STEER YOU FROM VENTURING INTO GRAY AREAS

The IRS sees everything as black and white as it relates to its tax laws. You either can or can’t deduct an expense, and there are requirements you must meet for every deduction. A good tax professional will guide you to ensure you stay out of trouble. If a tax professional likes to venture into the gray, you should look for someone else to assist you.

3. REPRESENT YOU IN CASE OF AN AUDIT

I like tax professional who will defend you when the IRS comes calling, which is bound to happen from time to time, even if you do everything right. It’s an inconvenience to be audited and can be a very stressful situation.  Ultimately, you’re responsible for the information on your return. But, a good tax professional will represent you and often handle the whole process for you, when you provide all the documentation at the time he prepares your return.

The tax code itself is around 4 Million words. And there were some huge changes for 2018 tax filing. Most people are working on their 2018 taxes now, let’s talk about the top 4 changes this year.

4 Top Tax Changes for 2018

1.    Lower Marginal Tax Rates. As your income rises, you pay a higher and higher marginal tax rate. If you’re single and earn $9,000, you only pay 10% in taxes on that money. If you earn $39,000 total then you pay 12% on the amount of income over $9,500. If you earn $80,000 you pay 22% on the income above $39,000. So, you have incentive to keep earning and making more, because your initial earnings are taxed low, 10% & 12%, but the higher earnings are taxed higher at 22%...this goes all the way up to 37% for people earning more than $500,000 a year. In 2018 the marginal tax rates were all slightly lowered, which helps to lower the taxes you pay.

2.    Increased Standard Deduction

3.             Personal exemptions eliminated. While tax reform increased the standard deduction, it also eliminated personal exemptions entirely. Before the changes to the tax plan, a personal exemption would reduce your taxable income by $4,050, and you could take one for yourself, one for a spouse and one for each dependent. The exemption phased out if you reached a certain adjusted gross income.

4.           Expanded child and dependent tax credit

With the tax plan changes, the child and dependent tax credit increases to $2,000 per qualifying child (it used to be $1,000), of which $1,400 is refundable.

Tax reform also created a $500 nonrefundable credit for qualifying dependents other than children.

What’s more, Congress increased the income level for when the credit begins to phase out to $200,000 (or $400,000, if you’re married filing jointly), making the credit available to more taxpayers.

Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax payable.

Ways to reduce your taxes

• Have your taxes prepared by a professional

• Contribute to 401(k) IRA

• Buy a house?

• Select the correct filing status

• Save receipts (charitable donations - cash and non-cash, healthcare costs (changing in 2019 to include only non-reimbursed expenses over 10% of AGI).

• Double check old returns for missed deductions - another reason to hire a pro

• Fund an IRA for non-working spouse

CONCLUSION

Filing a tax return can be intimidating. For some, it’s best to hire a professional to make sure your return is filed correctly.   For others, filing is straightforward and fairly simple, and a professional is not needed. Know which one best describes you, so you can get through tax season with confidence, and hopefully a little better off financially.