MONEY

Caution when it comes to doing your own taxes

Dan Henn
Financial Q&A

Happy New Year! I hope you are having a great start to the new year. It is that time of the year where we are putting away the Christmas stuff, writing our new goals (i.e. resolutions), getting the bills from all of the Christmas gifts we bought, and it is also time to start gearing up for tax season.

Today I am going to tell you a tale of caution. This tale of caution is to those Do-It-Yourselfers (DIY) of their own tax returns. Now I could just say DIY people in general. It is never a good idea to do your own plumbing, play with electricity or be on your roof. The same goes for your tax return, especially this year.

Why do I spread this word of caution? There have been a lot of changes in the tax world, that even many tax professionals are not fully ready. If you have been living under a rock this past year, there was a new tax law passed that first became effective in 2018. On top of that, there was a major revision to Form 1040 and a few other related forms. These two changes are going to make for a challenging tax season for everyone involved. This is not to mention the potential complications that are being created due to the government shutdown.

With all of these changes, many things are going to look so different. Many people are going to prepare their own returns and be thoroughly confused. Many are going to have refunds, with a few of them having a bigger refund than in the past. Some people are thinking they are going to have bigger refunds when it may not come out that way and wonder why. Then there are the people who are going to get hammered and not only owe more in taxes, but probably a lot more in taxes.

This is why I suggest working with a local tax professional. Work with a CPA, EA, or attorney that specializes in the area of taxes you need. I know the online services have a tax professional “in the box”, but there is just something that works better seeing the person from across the desk.

Having said all of that, here are some things that you need to be aware of on your tax return for 2018:

• Increased standard deduction. If you were borderline in the past on being able to claim itemized deductions and unless you made significant changes (such as larger charitable contributions), then it won’t be worth the effort to see if you can itemize this year.

• No personal exemptions. If you end up having a higher tax liability compared to 2017, this is probably the biggest reason as you no longer get the $4,100 per person deduction

• Lower tax rates. The lower tax brackets are what is helping to offset for many people the loss of the personal exemptions.

• Higher Child Tax Credit. If you have children 16 and under, and they qualify for the child tax credit, the new amount is now $2,000 per child. If you do not have a tax liability, then only $1,400 of it is refundable.

• New Dependent Tax Credit. If you have any other eligible dependents living with you that are 17 and older (kids, parents, aunt, brother, grandchild, etc.) that qualify as your dependent, they will give you a $500 per person tax credit. This is a non-refundable credit.

• 20 percent Pass-through deduction. This is for owners of S-corps, Partnerships, Sole Proprietors (filing Schedule Cs), and landlords. This is a 20 percent deduction on the lesser of (depending on your line of business and your income level as it can phase out) your pass-through income or 20 percent of your taxable income. This is a deduction that is calculated right before you get to taxable income.

• Kiddie Tax. If you have a child that has more than $2,100 in investment income, this is taxed now based on the Estate and Trust tax rates. The parent’s tax rate no longer comes into play.

• Itemized Deductions. Deductions are no longer allowed for 2 percent of AGI miscellaneous itemized deductions or personal casualty and theft deduction (except for Presidentially declared disaster areas). This is going to hurt sales people, financial advisors, truckers and pilots (and many others) who are employees.

Please also note the following items:

• Alimony is still deductible by the payor and includible in income of the payee if the divorce decree was created on or before December 31, 2018. It is not deductible or includible if created after then.

• Health Insurance Excise tax (aka penalty). This still exists for 2018 tax returns. So, if you did not have health insurance for 2018, then you will be facing this on your tax return unless you meet some other exclusion or have a hardship exemption.

As you can see, there are a lot of moving pieces when it comes to preparing your 2018 tax return. I don’t blame the DYI crowd for trying to save a buck, but remember, you don’t know what you don’t know. 95% of the time, when I review a previous return prepared by a DYI there is something wrong with the return. Fortunately, most of them have the problems in their favor, which means they are leaving money on the table.

So, do yourself a favor this year and find a qualified tax professional who can help you.

Dan Henn, CPA is a local certified public accountant. His firm specializes in IRS Collections Representation, real estate and medical taxation, year-round tax planning and tax preparation in Rockledge. You can contact his office at321-684-7800 or at danthetaxman@danhenncpa.com