Here's how to have a painless tax season
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Here’s how you can make taxes simple
Tax season is here and it’s time to gather your documents and get to work. The good news is: You can make it happen as painlessly as possible.
We understand that seems easier said than done, because – let’s be honest – taxes can be intimidating. But that’s why we created the Taxes Made Simple podcast with TurboTax and Yahoo Finance. It’s a resource that helps make doing your taxes a little more simple.
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What are the new tax changes this year?
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Janna Herron: This is Taxes Made Simple by Yahoo Finance and TurboTax. I'm Janna Herron.
So what are the new tax changes for this year? We know that last year there were a lot of big changes, but that doesn't mean everything's the same this year. There were a handful of changes I think people need to know about. Let's start with actually filing your taxes. You could always file your taxes for free by law, especially if you didn't have a very complicated tax return. This year, the IRS has stipulated that it should be easier and has actually created a website where you could go click on the free file and it would take you to one of the programs at TurboTax where you can file your taxes for free.
Now not everybody can file their taxes for free. It depends on how complicated your taxes are. For many, many Americans, their tax returns are pretty simple. If you're only depending on a W2 to fill out your tax return, or maybe you have a few 1099's, those things are very easy and you probably should qualify for the free file.
Another interesting change this year is the IRS is really, really interested in if you invested in cryptocurrency, such as Bitcoin. This year, the IRS is going to actually ask if at any time during 2019 did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency. So that might be a surprise for crypto investors out there. The reason behind it is that the IRS doesn't have good tracking on transactions that have to do with cryptocurrency. Usually, when you trade a stock, you sell a stock, you buy a stock, your brokerage account will send that information to the IRS and you will get a 1099 form to use to fill out your tax returns. When it comes to crypto, it's not nearly as sophisticated. A lot of the virtual currency exchange platforms don't generate those forms. So the IRS has been in the dark for a long time when it comes to cryptocurrency, so that's a big change.
There are some other things you should know about. If you got divorced last year, the way alimony or spousal support is considered by the IRS has changed. You no longer have to claim spousal support as income if you receive it from your ex-spouse. And if you're the one paying alimony, you can no longer deduct that amount from your taxes. So it's better if you are the one receiving the alimony than the one paying the alimony when it comes to this change.
There's a new change with medical expenses. If you're trying to deduct your medical expenses, it's a little bit harder this year, so your total health expenses in 2019 must be greater than 10% of your adjusted gross income for them to be deductible. Before that, the threshold was 7.5%, so it was easier to get above that threshold. Another change having to do with health insurance, if you didn't have health insurance last year, you don't have to pay a tax penalty. Before, under the Affordable Care Act. If you didn't have health insurance during the year for a certain amount of time, you would have to pay a penalty. But the new tax law that went into effect in 2017 eliminated that penalty starting last year.
The standard deduction also went up from last year to account for inflation. Now it's $12,200 for single taxpayers, $24,400 for married couples filing jointly and $18,350 for heads of household. If you do your taxes and you're really upset with how they turn out this year, say you got a really tiny refund when you wanted a bigger one, or even worse, you owe Uncle Sam some money and you don't want to do that next year, what you're going to need to do is adjust your paycheck withholdings. If you do that, you'll see that there is a new form for the paycheck withholdings, so that will be new to you.
Because it's new, it's going to be a little bit more difficult, but once you've done it and gotten the hang of it, it's actually pretty simple. My advice is to have your tax return handy so that you can plug in the numbers that the withholding form is going to ask for so that it can give you a very accurate reading on what you should withhold from each paycheck going forward. The IRS also has a paycheck withholding estimator, and what's really great about this calculator is that if you want to get a $5,000 refund, you can enter that and it will how to calculate what amount needs to be withheld from each paycheck so that you get that refund next year. And that's it for new changes this year for taxes.
This is Taxes Made Simple from Yahoo Finance and TurboTax. Please head over to Apple Podcasts and leave a five-star rating and review there. Until next time, thanks for listening.
What is a W-2?
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Janna Herron: This is Taxes Made Simple by Yahoo Finance and TurboTax. I'm Janna Herron.
So what is a W-2? Basically, it's a tax document that shows the total wages and amounts withheld for federal and state taxes, Social Security and Medicare for the calendar year. You will also find employee benefits on your W-2. You use the form to help you fill out your tax returns correctly. That's why it's so important. A W-2 either comes in the mail, as an actual paper document, or you can access it online through your employer's payroll portal. So if you usually get your pay stub online, that's probably where you're going to find your W-2.
So what is in your W-2? So your W-2 has a whole bunch of different boxes and each box shows a different piece of your tax picture. So for example, box one that shows the taxable wages you earned from your employer during the whole year. Box two is the amount that your employer withheld from your paycheck for federal income taxes. It gets a little bit more complicated. So box eight is four tips. So if you work in a restaurant, or you're a bartender, and you get tips during the year, you'll see in an amount in box eight that your employer reported. But if you kept really good, accurate records of your tips during the year, you can actually ignore that amount and put what you calculate as your tips for the year. But you have to have really good records. Because if you don't and the IRS comes knocking, they will want to see proof. And if you can't provide it, then you're in trouble.
So there are other boxes still left. Box 10, you're employer helped to pay for your childcare as a benefit. You'll see that in box 10. If it's more than $5,000, then it's taxable. Then, in box 12 also shows other employee benefits you received during the year. You won't know what it is. There'll be a code in box 12 and for example, code D shows the amount of 401k contributions you made during the year. Code W shows the amount your employer contributed to your health savings account or HSA. Then, you have box 17, and that's the amount of state tax that was withheld from your wages during the year. So that's kind of a quick overview of what you'd find in your W-2. But here are some more important things you should remember. First, when should you get your W-2? Your employer must send it to you by January 31st, by law. If you don't get it by that point in time, then you need to contact your HR, or your payroll, or your boss, and find out where it is. Maybe they have the wrong address on file, for example, or something else went wrong.
You should also double-check your W-2 in case there were mistakes. It doesn't happen often, but a mistake can make things a little bit difficult for you down the road with the IRS. For example, if your employer forgot to include tens of thousands of dollars in wages, don't think you got away with a fast one. That's going to come back to haunt you at some point, so double-check the numbers. And the way you do this is to look at your final pay stub for 2019 and then compare that to your W-2 and make sure those numbers match up. In your pay stub, you should see year to date how much taxes were withheld, your total wages for the year, so those numbers should match up with what you see in your W-2.
When it comes to mistakes, one of the most common mistakes is either missing or misreported state and local taxes, especially if you live in one state, but you work in another state. On this point, if you do live in one and work in another, you should get W-2's allocated to each state. That should show your taxes to each state, which may include local taxes. For example, if you work in New York, but live in New Jersey, New York City has local taxes, so you should see that on the W-2 that you receive. If you see that your W-2 has mistakes, you need to do something about it. The best thing to do is contact your payroll department or whoever at your employer to let them know that you think there's a mistake. It's easier to fix a W-2 than to file an incorrect tax return and have to go back and amend it.
I think one of the biggest things to remember is you don't want to fudge the numbers. You want the numbers that you put on your tax return to match the ones on your W-2. Why is this? Because the IRS also gets a copy of your W-2, so they're expecting you to report the same thing that shows up on your W-2 if you don't, you'll probably get a letter from the IRS and it also could delay your tax refund if you're expecting one. And that's all we have for W-2's.
This is Taxes Made Simple from Yahoo Finance and TurboTax. Please head over to Apple Podcasts and leave a five-star rating and review there. Until next time, thanks for listening.
Credits or deductions? Here are the differences
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Janna Herron: This is Taxes Made Simple by Yahoo Finance and Turbo Tax. I'm Janna Herron.
Tax credits and tax deductions. What's the difference between them? Both a tax credit and a tax deduction are very helpful on your tax returns, helps you to save money, but they do it in different ways. It's important to understand how they do it.
A tax credit is the most beneficial and that's because it's giving you a dollar for dollar reduction of your tax liability. For example, a tax credit that's valued at $2,000, such as the child tax credit, lowers your tax bill by $2,000. That's great.
A tax deduction also lowers your tax bill, but not one for one. It depends on your tax bracket, how much you'll get out of a tax deduction. If you fall into the 12% tax bracket, a $1,000 deduction saves you $120.
There are important differences among tax credits as well. There's a tax credit that is called nonrefundable. What that means is if you don't owe very much in taxes and you get a tax credit, but it takes you below zero on your tax bill, you're not going to get a refund of the difference. For example, say you have an $800 tax bill and you get a $1,000 nonrefundable credit, that doesn't mean that you're going to get $200 back from the government. That's a nonrefundable credit.
But there are some credits that are refundable. That means that if you have that $800 tax bill, you get a $1,000 tax credit and it's refundable, you get $200 back from the government. Some of the most popular refundable credits are the earned income tax credit, also called EITC and the child tax credit.
The IRS has specific requirements for you to qualify for both nonrefundable and refundable credits, so you need to look into that.
Then there are deductions. There several different types of deduction. The big one that you're probably familiar with, as most taxpayers are, is the standard deduction. It's the one-size-fits-all reduction in the amount of your taxable income. You don't really have to do anything to qualify for the standard deduction. You just can take it. For single taxpayers this year, it's $12,200; for those married filing jointly, 24,404; and for heads of household, it's $18,350. You can claim the standard deduction on your regular form 1040, which is the basic tax form that you use.
Other deductions that you might take, you have to itemize your taxes. You don't take the standard deduction in this case. You will be taking all these other smaller deductions that should add up to more than the standard deduction for it to be beneficial for you. There is a deduction for the state and local taxes that you pay. That's capped at $10,000, which is the second year that it's been capped. There is a deduction for the mortgage interest that you pay during the year. There's a deduction for medical expenses. As long as you spent enough on your medical expenses during the year to reach the threshold, then you can deduct some of those costs. Everybody's probably heard of a deduction for charitable donations. That also exists. If you end up itemizing your deductions, it's going to be a little bit more work when it comes to filing your taxes because you have to make sure you have the required documentation for all of those things, such as the mortgage interest. You need to know how much mortgage interest you paid during the year. You have to have documentation that you donated so much to a charity.
For those of you who are self-employed, deductions are probably very important to you. Anything that you spent on your business can be deducted. For example, if you use a room in your house as your office, a certain amount of your heating bill, a certain amount of the mortgage that you pay or rent that you pay, may be deductible. If you have a phone line that's dedicated to your business, also, that cost can be deductible.
Over the years, there've been very interesting deductions that people have taken and that the IRS approved. For example, a Wisconsin bodybuilder deducted almost $14,000 for the cost of body oils, including a tanning product. This was from 1999 to 2001, because it helped his career. The US tax court okayed these business expenses because they were used for his business.
It's really important to make sure that the deductions you make are not exaggerated and that you do have that proof. Anytime deductions that are a little bit higher than they should be will raise the eyebrows at the IRS, especially if you fudge the mortgage interest that you paid or charitable contributions. The IRS will definitely lookout for that. Agency uses statistical algorithms to make sure that your deductions are in line with your income. If they're too high, they may send a letter asking for more documentation. This is especially true when it comes to business expenses. People seem to think that there's a lot of wiggle room when it comes to reporting that. You don't want to claim more deductions than your profits, for example, or writing off 100% of an item as a business expense that is often used personally, such as your cellphone or your car. That also will be a red flag to the IRS. That's all for tax credits and deductions.
This is Taxes Made Simple from Yahoo Finance and Turbo Tax. Please head over to Apple Podcasts and leave a five-star rating and review there. Until next time, thanks for listening.
What are the tax brackets this year?
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Janna Herron: This is Taxes Made Simple by Yahoo Finance and TurboTax. I'm Janna Herron.
What are the tax brackets for this year? In general, I think tax brackets are a little confusing because they're not just flat rates. Let's go over what the tax brackets are this year. Maybe then, I can explain how tax brackets work.
What are the tax brackets this year? Tax brackets are pretty complicated. It's not just a flat rate. We'll get into that in a minute. The easy answer is there are seven federal tax brackets. This is how it goes. It depends on your filing status, so whether you're filing as a single, married, filing jointly, or as a head of household.
The seven rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The easiest tax bracket to understand is 10% or the lowest one. If you're a single taxpayer, and you make less than $9,700, your tax rate on that entire amount is 10%. If you make more than that, say you make $15,000, the first $9,699 will be taxed at 10% which is the lowest tax bracket. Then the remaining amount will be taxed at the next highest tax bracket which is 12%.
Which tax bracket you belong in depends on both your income and whether you file as a single taxpayer, a married but filing jointly, or head of household. The income thresholds are different for those three types of taxpayers. Let's start with a single taxpayer.
The lowest tax bracket is 10%. Those who make under $9,700 pay that 10% tax rate. Single taxpayers who make between $9,700 and $39,474 are subject to the 12% tax rate. Single taxpayers who make between $39,475 and $84,199 are subject to the 22% tax rate. For those who make between $84,200 and $160,724 are subject to the 24% tax bracket. Those making between $160,725 and $204,099 are subject to the 32% tax bracket. Single taxpayers who make between $204,100 and $510,299 are subject to the 35% tax rate. Those who make over $510,300 are subject to the 37% tax rate.
What's important to remember is that if you're in a higher tax rate, not all of your dollars that you earn are taxed at that rate. That would be a flat rate type of taxation. In the United States, we have a progressive tax rate. I'm going to break it down really, really easily.
Let's say you make $100,000, and your first tax bracket is at 10% up to $25,000. The second tax bracket is 12% up to $75,000. Then your last tax bracket is 15% up to $100,000. So you don't pay 15% on all of your $100,000 that you make. On the first $25,000 that you make, you're subject to the 10% tax rate. Then the earnings between $25,001 to $75,000 is subject to the 12% tax rate. Then everything else up to $100,000 that you've earned in a year is subject to the 15% tax rate.
The income thresholds for heads of households are higher than those for single taxpayers for each of the tax brackets. They're even higher for the married individuals filing joint returns for each of their tax brackets. That's because you have two people filing a joint return. The income thresholds usually change year by year to adjust for inflation. So what the income threshold for your tax bracket this year may not be the same as next year. Also, if you get a raise, a new job, a promotion, or your spouse starts to work, that might throw you into a higher tax bracket. You'll see your taxes go up. That's all for tax brackets.
This is Taxes Made Simple from Yahoo Finance and TurboTax. Please head over to Apple Podcasts and leave a five-star rating and review there. Until next time, thanks for listening.
