Tax Questions to Consider Now

It’s easy to forget that what happens in your working and personal life can affect your tax returns in any given year. Before tax season deadlines sneak up on you, now is a good time to take a moment and consider what changes may have occurred in the past year that will affect your tax return.

  1. Has your address or phone number changed since the prior year? 
    Please provide your current information so we can be sure your return is filed accurately.
  2. Did you welcome a new child in 2019? 
    If the answer is yes: First, congratulations! We’ll need to update your organizer with their full name, date of birth, and SSN.
  3. Did you collect unemployment for all or part of the year? 
    If so, we’ll need your 1099-G form. Like all official tax document, these are required to be sent to you before the end of January.
  4. Is your health insurance through the Mass Health Connector? 
    You’ll to wait for your form 1095A from the state before filing. These forms are sent out by the state before the end of January. Remember: We cannot process your return without this form!
  5. Did you pay any rent last year? 
    Please let us know how much you paid, as well as the name of your landlord.
  6. Do you believe your medical expenses may be deductible? 
    Most taxpayers do not have enough qualifying medical deductions to itemize under current rules, but if you think you do, please provide us with ONLY THE TOTALS of these expenses. DO NOT bring or send us your medical and dental receipts. This will both maintain the privacy of your medical information, and allow us to process your return more quickly. See our more detailed posts about medical deductions here and here.
  7. Are you paid by direct deposit?  
    Even if you are not, we recommend making a habit of checking your pay stubs every month to verify the withholdings are per your instructions. Since most employees are paid via direct deposit, and paystubs usually issued by email, most go unchecked. This can result in errors being discovered in the following year when it is too late to make any corrections. See our additional post about this here.

You can probably think of additional happenings in your life that might make a difference on your Federal or State returns. Give us a call soon if you have further questions we can help answer for you.

Why Checking Your Paycheck Can Pay Off

One item to be aware of as we move into the new decade is the importance of checking your paystubs on a regular basis to ensure accuracy, particularly with regard to your withholding. A recent study has shown that most people receive their payroll check through direct deposit and their paystubs are usually issued by e-mail. As a result of this, most paystubs go unchecked, and unfortunately errors may be discovered in the following year—when it is too late to make any corrections.

To avoid this, we recommend making a habit of checking your pay stubs every month to verify the withholdings are per your instructions—even if you are not not paid via direct deposit.

See our earlier post about the IRS’s online withholding calculator here.

Itemized Medical Deductions? Probably Not.

With the astronomical costs for prescription drugs, it’s not unusual for us to hear from clients that the believe they should itemize their taxes based on their medical expenses. The truth is, even for a couple with multiple prescriptions from more than one pharmacy, most taxpayers do not have enough qualifying medical deductions to itemize under current rules.

The current threshold for standardized deductions is what helps us decide whether it makes sense for you to itemize. The best and fastest way to determine this is to have the total amounts of your categorized expenses.

There are cases, of course, where itemization may be warranted—for instance if you have experienced a catastrophic event where your out-of-pocket costs represent a significant portion of your income. Either way, We DO NOT need to see your receipts! Nor should we. ONLY THE TOTALS of these expenses are required, and in the interest of both protecting privacy of your medical information, and processing your return more quickly, we ask that you do not bring or send us your receipts. If the deduction for medical expenses is ever questioned, we would need to see the receipts at that time, but that would be the rare exception.

Can You Deduct Your IRA Contribution This Year?

Allowable deductions for Iindividual Retirement Account (IRA) contributions are based on these three factors:  

  1. Whether or not you are covered by a retirement plan at work
  2. Your filing status
  3. Your adjusted gross income (AGI)
clipart-income-tax-rates-2018 7

If you are considering making an IRA contribution for 2019, we suggest that you consult the tables provided by the IRS at the links below to see how your AGI will affect whether you can deduct all, some, or none of your IRA contribution(s).

IRS rules for IRAs: If You Are Covered at Work or If You Are Not Covered at Work

Medical Expense Deductions for 2019

The percentage for deducting medical expenses on Schedule A increases to 10% of adjusted gross income this year, versus the 7.5% allowed for 2018. Historically, most taxpayers don’t meet this threshhold—and we anticipate even fewer with the larger percentage requirement—but it is still worth investigating, particularly if you or your family members have undergone any significant medical procedures in the past 12 months. 

health_insurance_illustration 2

To figure out if you have enough medical expenses to claim a deduction, the formula is to multiply your Adjusted Gross Income by 10%. For example:If your Adjusted Gross Income is $100,000.00, any out-of-pocket medical expenses above $10,000.00 can be added to Schedule A as a deduction.

If it is available, the best way to deduct your medical expenses is still to take advantage of a Flexible Spending Account through your employer. 

Please note that we do not need to see copies of your medical and dental receipts! The total amount of all of your medical expenses is all we need to include on Schedule A if you are itemizing. If the deduction for medical expenses is ever questioned, we will need the receipts at that time, but otherwise, you should maintain the privacy of your medical information just as you would with any service provider.

Increases to Standard Deductions for 2019

The standard deductions for 2019 returns are as follows:

$24,400.00 if you are Married and filing a joint return; 
$18,350.00 if you are filing as Head of Household; and 
$12,200.00 if you are a Single filer.

You’ll notice they haven’t gone up much, but every little bit helps!

MA Senior Circuit Breaker R.E. Tax Credit Increases

There is good news for taxpapers 65+ who qualify for the Massachusetts Circuit Breaker real estate tax credit program. For some senior citizens who own or rent residential property as their primary residence, the credit has increased by $30.00 this year, to $1,130.00. The maximum assessed value of the homeowner’s principal residence, has also increased, by $30,000.00, to $808,000.00.The qualifying income threshholds have increased as well, by $2,000, regardless of filing status, as indicated below:

Filing Status20182019
Single$58,000$60,000
Head of Household$73,000$75,000
Married Filing Jointly$88,000$90,000

 This may be enough of an increase to include some of our clients who previously were ineligible. We’ll be looking to determine your qualifications as we head into tax season to make sure no deserving seniors miss out. 

401(k) Contribution Limits Increase for 2020

IRS Notice 2019-59, published on November 6, 2019, announced changes to employee contribution limits for 2020. Now, employees enrolled in 401(k), 403(b), and the majority of 457 plans may contribute up to $19,500 towards their retirement.

The catch-up contribution limit for employees aged 50 and over who participate in these plans is increased from $6,000 to $6,500. The limitation regarding SIMPLE retirement accounts for 2020 is increased to $13,500, up from $13,000 for 2019.

Payroll Withholding Calculator

Curious about whether your current withholdings will be sufficient under the new tax laws? The IRS has made available a new self-service online tool which can help you determine this. It is important to read the instructions carefully before you start, as you will need to have documentation handy to answer several of the questions (e.g.most recent tax return, pay stubs).

The system will prompt you for missing information, but you will need to know things like your projected income for 2018, and number of children who qualify for the child tax credit (they must be under age 17 as of 12/31/18), so make sure to gather everything you need before you start the questionnaire. Also, please note that If your health care is through the Health Connector, this amount will not factor in to the ACA premium tax credits.

You can access the Withholding Calculator at this link:
https://www.irs.gov/individuals/irs-withholding-calculator

That Additional IRA Withdrawal Could Be Lost to Social Security Taxes

According to the IRS, the formula to determine if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income (combined income = adjusted gross income + nontaxable interest + half of your Social Security benefits).

Combined income info

If your combined income is above a certain limit (the IRS calls this limit the base amount), you will need to pay at least some tax. The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The same applies if you are married filing separately and you lived apart from your spouse for the entire tax year. The limit for joint filers is $32,000. If you are married filing jointly and you lived with your spouse for any part of the tax year, all of your Social Security income is taxable.

IRS baselimits chart 5

When retirees need extra money their first choice is generally taking an additional IRA distribution. What they may not realize is that this is taxable income, and therefore it increases their taxable Social Security amount. For example, an additional $12,000 IRA distribution may increase the taxable Social Security portion by as much as $6,000.

If it’s available to you, the safest bet for an immediate cash need is to use your savings. Though this may seem counterintuitive, you can see how adding any money that is considered taxable income to your base limit could potentially end up costing you money.

For the same reason, if you do need to take an additional distribution from your IRA, make sure you think about how much you really need. For instance, if you only need $5,000, but take $10,000 with the idea that it will give you a rainy day fund, at least some of that money may be eaten up in taxes if it causes your taxable income to exceed the base limit. 

Whatever your circumstance, we are here to help. Give us a call if you have questions about the best course of action for your particular situation.