Tax season is upon us again
ASU faculty share what you need to know this year
“OK, Marge, if anyone asks, you need 24-hour nursing care, Lisa is a clergyman, Maggie is seven, and Bart was injured in Vietnam,” Homer Simpson says as he does his taxes in “The Simpsons” episode “The Trouble with Trillions.”
Yes, it’s that time of year again, and we’re not talking about Christmas.
Here’s what two professors from the Arizona State University School of Accountancy had to say about what you need to know when filing this year.
The Tax Cuts and Jobs Act of 2017 is still in effect.
“We’ve moved to a large standard deduction, double what was before,” said Associate Professor Jenny Brown. “It has had an impact on individuals because it has reduced or decreased the number of people who have detailed because the standard is now double what it was before. It’s still there. … It will be phased out in 2025.”
Deduct for charitable donations this year.
Generally, when you make a contribution to charity, it is an itemized deduction. But with the standard deduction so large, most people won’t take a deduction for charitable contributions.
“However, with the pandemic, they have made it so that a single taxpayer can take a deduction of up to $300 for any charitable donation they make,” Assistant Professor David Kenchington said. “And it doesn’t have to be in the standard itemized deduction. If they are married and filing a joint application, it can be up to $600. It would be something to be aware of. I think it’s going next year.
You have a mountain of expenses. When should someone detail?
“You should itemize when your total itemized deductions are greater than your standard deduction,” Kenchington said. “If your charitable donations, your mortgage interest, your state taxes, which would usually be a combination of your income taxes, plus your property taxes – when those are over $26,000, that’s what when you would take the itemized deduction.”
If people have mortgage interest, it may be beneficial to itemize. The Tax Cuts and Jobs Act has a cap on the state and local taxes you can count for an itemized deduction. The cap is $10,000.
“Even if you have property taxes or state income taxes that exceed that, especially if you add them to the property, the maximum that can go into your itemized deductions is $10,000,” Brown said. . “It’s still in place right now, that ceiling.”
Another novelty this year is the advance child tax credit. It’s gonna take a bite.
“You got that credit in advance, and that just means when people file in April, their potential refunds won’t be as big as they might have been in years past, because they basically got an advance on that money. over the year,” Brown said.
What about stimulus checks? These are credit advance payments, but they are different from the child tax credit.
“This is where it all starts to get a little complicated,” Kenchington said. “But if taxpayers did not receive this third stimulus check, they could still be entitled to a credit on the tax return called the clawback refund tax credit. Again, we can give you high-level items they should be looking for. We cannot provide personalized planning advice as they will need to self-initiate. But that would be something else to look for.
A lot of people have side jobs. What should construction workers do?
This income is taxable. If you’re with a big platform like Uber or DoorDash, check with them. They might have educational information gathered on what to do. This usually goes on Schedule C. Then you can try tracking your expenses and categorizing your expenses against that self-employment income. But the biggest pitfall that people aren’t aware of is that you have to pay self-employment taxes.
You are responsible for paying both parts of payroll taxes: the employee part and the employer part, because as an independent contractor, you wear two hats. You are the employee and the employer. Whereas if you are a traditional employee and you get a W-2, you have had the employee’s share withheld and remitted by your employer.
“So that’s a little misleading,” Brown said. “You don’t even really see it. It happens in the background. And then your employer is responsible for paying the other half. So it’s kind of a big surprise for independent entrepreneurs. They don’t realize that the first element is that they are responsible for self-employment taxes.
“And then the second thing that they’re just not aware of is that on the income tax side, which is different from payroll taxes, you’re supposed to prepay your income taxes. But as a self-employed, you should make estimated quarterly payments, and that can be a big surprise, and if you don’t make enough estimated quarterly payments, you can be penalized for not prepaying enough.
Good record keeping of fuel, mileage, depreciation, etc. may reduce tax liability.
You have worked a lot from home. Can you deduce all of this? If you have an employer that provides you with an office somewhere, that’s a definite no. The old rules about XX square feet of space, having a separate phone line, and a myriad of other restrictions have always made a home office deduction tricky.
“It’s always tricky,” Kenchington said.
You have played a lot on the markets: Robinhood, GameStop, etc.
“So when you’re trading in these regular taxable brokerage accounts, all of that income is tax,” Brown said. “The income from these winnings is taxable. And if you’re trading short-term, that income is taxable at your regular rate, your ordinary rate. You do not benefit from a preferential rate. And so I think a lot of young people who have been caught up in this frenzy might be surprised, especially because each of these transactions needs to be listed separately. So you could have a very big, very long what we call Schedule D, where you report all these transactions.
Finally, the turbo tax? A CPA? Do it yourself?
“If you think you qualify for the free file or even if you’re not sure, I would go to the IRS website first and check if you might qualify for the free file system,” he said. Brown said. “And then beyond that, there are plenty of taxpayers who are perfectly capable of using one of these programs or doing it themselves and they don’t need to go to a CPA. And it depends on the complexity of your situation. Obviously, if you have a lot of trades during the year, for example, someone who has done a lot of trades in the market or has a small business or a partnership or income from different sources, the more you add layers of complexity, the more hours. will take for you or a tax preparer to complete this return. »
Ultimately, the more complicated your return, the more it will cost you to prepare it.
Does this seem confusing to you?
“We want to keep our jobs,” Kenchington said. “No matter what people say about tax simplification, it’s unlikely.”
Top image by stevepb/Pixabay