Death and Taxes
Ben Franklin’s quote on taxes is well known among Americans, ‘in this world nothing can be said to be certain, except death and taxes’. But for all the certainty around the first, there is far less confidence among average tax-payers when it comes to the second.
Sure, Americans know they need to pay taxes each year. But what exactly should they pay for, and not pay for? The answers here can be surprising, as many folks can fairly minimize their tax in some areas, but easily make a misstep that can prove costly (read: an IRS audit!). So let’s look now at 7 of the most common issues Americans overlook in their personal tax.
Do I Need to Pay Taxes?
Almost half of Americans don’t pay federal income tax (FIT). As the Tax Policy Center detailed, in 2016 over 44.3% of American households did not put some coin in the federal money jar. A percentage point or two may have shifted since 2016, but this trend is long and enduring. And it’s also essential to be aware of as you may not need to pay any tax.
At present, if you are a single and earn less than $10,400 a year, you do not need to pay FIT. As anything below this amount is equal to the standard deduction and exemption amounts. It may be hard to imagine in a nation with fast-rising cost of living many Americans would make less than this amount, but college students, stay-at-home parents, seniors who don’t (yet) receive social security, and professionals who take a career ‘gap year’ can all fit this category.
While it’s always important to keep good records of your earnings and expenses, if your total income is south of $10,400? You don’t need to file a tax return.
2. What About My Partner’s Earnings?
OK, what was just written is 100% true. But it comes with a caveat. If your income was beneath the threshold this year but your romantic partner earned millions? That is a potential tax issue. The implications of a big difference in income between you and your partner can vary. If you are married and reside in the same household? Then your tax return will have some bearing on theirs, and vice versa. If you’ve just began dating someone last month and have no financial links save for occasionally buying each other red roses? Then your tax returns are essentially separate.
3. Is My Fit Applicable Only to Me as an Individual?
Another consideration to keep in mind is any status you hold beyond your individual one. You may regard yourself as an everyday American who just runs a regular business. But what if your accountant did recently turn your business into a company? Things may have changed significantly in the way you file, even if little has changed in the day by day of the business.
The same applies to other areas of tax. Like investments held in trust. Again, you may have just taken the advice of your lawyer or accountant and set up a new structure per their recommendation. By no means is this to suggest this recommendation was wrong, but it is essential to double check with a professional if you’ve made any big changes like this recently.
Ultimately, such structures should benefit you tax-wise, so ensure you establish their impact.
4. Have I Moved or Done Business in Another State Recently?
While FIT applies to all 50 states, at the state-level there is a variety of different taxation arrangements. These can impact your tax return if you have moved or done business in another state. While where you are domiciled (a fancy way of saying where you live) is usually the chief factor for your taxation status, if you have earned income in another state filing a tax return there is often necessary.
Exceptions to this do exist. If you are a remote worker and have not physically worked in another state (but instead just been hired by a business there), if you have a company located in a state that does not use a tax nexus, and if you earned income in a state with no state income tax, then this could alter the total earnings and deductions of your FIT. If you are in this scenario and find it too complex, its wise to consult a tax professional to ensure your federal tax return is accurate.
5. Is Every Deduction I Claim Used as Intended?
For all the irritations of a tax return, deductions are where Americans can ‘score one back’.
This is the fun section where you get to ask Uncle Sam for some greenbacks back because you purchased things you require for work. But deductions also need to be accurate. Many Americans have gotten into hot water for being too generous defining employment expenses.
This is a particularly important issue for somebody who uses equipment for work and play.
If you have purchased a new photocopier for your home office that you only use for it? Claim a deduction for it at 100% usage. But if you purchased a shiny new laptop you use for work, but also for social media and movies? You can claim only for the amount of time you use it for work.
The same applies if you split payment for an item with colleagues at work or family at home. Only claim a deduction on the share of the total amount you paid, not the whole sum.
6. Are There Any Rollovers from Last Year’s Return I Should Be Aware Of?
While filing a normal tax return each year is required (excluding the exceptions cited in 1), this does not mean you necessarily have to pay the same rate of tax each year. The IRS considers your tax return year by year, but also your earnings as a whole over a long duration of time.
That’s where a variety of elements like capital gains, depreciation, estate tax and vesting of trusts can come in. These factors may not be directly related to a main source of income like your job, but can make a big difference in your overall earnings and taxation rate from one year to the next. The IRS recognizes this, and that’s why a variety of rollovers exist. This is another area to keep in mind as you file, and if in doubt consult a professional for in-depth advice.
7. Have I Double Checked to See Everything Is Accurate?
We understand, tax returns are stressful, and if we’re blunt? An irritating interruption to regular life.
That’s why when many Americans are at the finish line of filling their own returns – whether themselves or via an accountant – they usually just rush to the finish, delighted it’s all over.
But this is a bad habit to build, and can come back to bite you later on. That’s why it is essential to review your return, whether it’s to be filled by you or your accountant on your behalf.
It is essential to be mindful of your obligations but also to recognize some good faith exists. Despite the popular stereotype, the IRS is not out to get you and everyone you know. They are unlikely to kick down your front door on a 4 a.m. raid because you wrongly declared 5c paperclip. And they look kindly on any mistake you have made when you self-declare it.
That’s why it is possible to amend your tax return after submission if you make a mistake. Certainly mistakes are best avoided, and due care must be taken with your taxes, but the amendment process exists for a reason; and that’s because it can be easy to err slightly.
So, be forthcoming on what you should declare, conservative on what you shouldn’t, and if you do make a mistake? Look to address it quickly with your accountant, or direct with the IRS. Follow this formula and you’ll be certain future tax returns will be profitable and drama-free.