“OK, Marge, if anyone asks, you require 24-hour nursing care, Lisa’s a clergyman, Maggie is seven people and Bart was wounded in Vietnam,” says Homer Simpson as he's doing his taxes in "The Simpsons" episode "The Trouble with Trillions."
Yep, it’s that time of year again, and we’re not talking about Christmas.
Here’s what two Arizona State University professors from the School of Accountancy had to say about what you need to know when you file this year.
The Tax Cuts and Jobs Act of 2017 is still in effect.
“We moved to a big standard deduction, double what had been previously,” said Associate Professor Jenny Brown. “That impacted individuals because it lowered or decreased the number of people who itemized because the standard is now double what it used to be. That's still there. ... It will phase out in 2025.”
Deduct for charitable giving this year.
Typically when you give a contribution to charity, that 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 made it so that a single taxpayer could just take a deduction of up to $300 for any charitable giving that they give that they make,” said Assistant Professor David Kenchington. “And it doesn't have to be in the standard itemized deduction. If they’re married, filing jointly, then it's up to $600. This would be something to be aware of. I think it goes away next year.”
You have a mountain of expenses. When should someone itemize?
“You should itemize when your total itemized deductions are larger than your standard deduction,” Kenchington said. “If your charitable giving, your mortgage interest, your state taxes, which would be a combination typically of your income taxes, plus your property taxes — when those are greater than $26,000, that's when you would take the itemized deduction.”
If people have home mortgage interest, it can be beneficial to itemize. The Tax Cuts and Jobs Act came with a cap on state and local taxes that you can count towards 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 together with property, the most that can go into your itemized deductions is $10,000,” Brown said. “That's still in place right now, that cap.”
Also new this year is the advance child tax credit. That’s going to take a bite.
“You got that credit in advance, and that just means that when people go to file in April, their potential refunds aren't going to be as large as they would maybe have been in years past because essentially they got an advance on that money during the year,” Brown said.
What about stimulus checks? They’re advanced credit payments, but they’re different from the child tax credit.
“This is where it all starts to get a bit complicated,” Kenchington said. “But if taxpayers didn't receive that third stimulus check, they might still qualify for a credit on the tax return called the recovery rebate tax credit. Again, we can give you high-level things that they should look for. We can't provide individual tailored planning advice, because they're going to have to jump into that themselves. But that would be something else to look for.”
A lot of people have side jobs. What should gig workers do?
That income is taxable. If you’re with a big platform like Uber or DoorDash, check with them. They might have educational information put together on what to do. That typically just goes on Schedule C. Then you can try to track your expenses and file your expenses against that self-employment income. But the biggest pitfall there that people aren't aware of is that you have to pay self-employment taxes.
You’re responsible for paying both parts of payroll taxes: the employee part, and the employer, because as the independent contractor, you're wearing two hats. You're the employee and the employer. Whereas if you're a traditional wage earner and you get a W-2, you have had the employee's part withheld and remitted by your employer.
“So it's kind of deceptive,” 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 that's kind of a big surprise for independent contractors. They don't realize that first piece is that they're responsible for self-employment to taxes.
"And then the second thing 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 person, you should be making quarterly estimated payments, and that can come as a big surprise. And then if you don't make a sufficient, quarterly estimated payments you can get hit with a penalty for not prepaying enough.”
Good record-keeping of gas, mileage, depreciation and so forth can reduce tax liability.
You worked from home a lot. Can you deduct any of that? If you have an employer who provides an office for you somewhere, that’s a hard no. Old rules about the space being XX square feet, having a separate phone line and myriad other restrictions always made a home office deduction tricky.
“It's still tricky,” Kenchington said.
You played around a lot in the markets: Robinhood, GameStop, what have you.
“So when you're trading in these taxable regular brokerage accounts, all that income is tax,” Brown said. “The income on those gains is taxable. And if you trade short term, that income is taxable at your regular rate, your ordinary rate. You don't get a preferential rate on it. And so I think a lot of younger people who got caught up in that frenzy might be surprised especially because every one of those transactions has to be separately listed. So you might have a very large, very lengthy what we call Schedule D, which is where you report all those transactions.”
Finally, Turbo Tax? A CPA? Do it yourself?
“If you think you qualify for the free file or even if you are not sure, I would go to the IRS website first and check and see if you might qualify for the free file system,” Brown said. “And then beyond that, there are lots of taxpayers who are perfectly capable of using one of those software systems or doing them on their own and they do not need to go to a CPA. And it depends on the complexity of your situation. Obviously if you have lots of transactions during the year, for example, someone who did lots of trading in the market or they have a small business or a partnership or income coming from different sources, the more layers of complexity you add the more hours it's going to take either for you or a tax preparer to complete that return.”
Bottom line, the more complicated your return, the more it’s going to cost to have it prepared.
“We want to keep our jobs,” Kenchington said. “No matter what people say about tax simplification, it's unlikely.”
Top image by stevepb/Pixabay
More Business and entrepreneurship
Thunderbird faculty examine role, benefits of compassion in financial industry in new book
Companies thrive when they have both a productive business philosophy and a motivated workforce whose voices are heard. However, achieving those goals isn’t always easy amid the pressures and myriad…
Top faculty honor has ASU professor flying high
Arizona State University Professor Thomas Choi considers the complex aspects of supply chain networks and often sounds like a philosophy teacher. Take this analogy, for example: Choi likens the V-…
ASUio sparks innovation inferno among student entrepreneurs
Innovation, accessibility and sustainability took center stage at the 2024 Arizona State University Innovation Open. Technology innovation and entrepreneurship were on full display at the event,…