Should You Itemize or Take the Standard Deduction?

When it comes to preparing your taxes, your accountant or tax software is only as good as the information you provide. And when it comes to what kind of deduction you want to take to provide the most tax savings allowable, you will need to furnish the best information you can.

But First, What Is Itemizing Deductions?

Itemizing your deductions is done on Schedule A and is attached to the federal Form 1040.

Your itemized deductions are all of the expenses you incurred during the year that the IRS allows you to deduct from your gross income.

For people that had high amounts of allowable expenses, it can be more beneficial to do this. However, itemizing your expenses costs more, usually regardless of if you are during your taxes yourself through software or having a tax pro do them, and takes more time throughout the year for recordkeeping.

What About Taking the Standard Deduction?

Taking the standard deduction is as simple as subtracting an arbitrary number determined by Congress from your gross income. No recordkeeping and no squabbling with an accountant about what is an allowed expense.

However, the standard deduction is limited to an amount that is indexed for inflation. The standard deduction in 2017 for single filers is $6,350.

So When Is It Beneficial to Itemize Versus Taking the Standard Deduction?

It’s only beneficial to itemize your deductions if they exceed the amount of the standard deduction. If they don’t, you’re likely wasting your time.

Now, the standard deduction is going to be getting an overhaul next tax season, rising to $12,000 for single filers in the 2018 filing season, meaning your deductions would have to exceed $12,000 for an itemized list of deductions to be beneficial.

It’s likely this will significantly reduce the amount of people that itemize, especially considering roughly only 30% of filers itemize currently.

 


This page is not meant to constitute financial advice. For specific information concerning your financial situation, please contact your local financial advisor.

Are the Tax Cuts Really Going to the Rich?

Since when did we become so obsessed with everyone else’s bills?

Particularly, when did we start caring so much about what our neighbors owe in taxes compared to ourselves? What we pay to Uncle Sam has become such an arbitrary amount, something that accountants can effectively plan to reduce and even eliminate if done properly.

There’s been plenty of rhetoric lately about who’s benefiting from the new tax bill. And of course it is no surprise that any time there are changes to the Tax Code there are winners and there are losers in relation to what it was prior to the change.

And the system is designed to be as fair and understandable as possible. But when it comes to tax law, those two goals are conflicting. The more “fair” the law is, the more complex it becomes.

So how fair can the system be when the new tax cuts are going to the rich?

Sure, there are some things in the new tax law that directly benefit the rich, such as reforming the alternative minimum tax, making big changes to the estate tax, as well as reducing the top marginal tax rate from 39.6% to 37%.

But so what?

Big changes are coming to help the middle class as well. Doubling the standard deduction, doubling the child tax credit, and reducing the marginal tax rates for middle and low income earners.

The tax cuts were meant to be tax cuts across the board. And for the most part, they are. The media wants to make this story “us vs. them,” but it shouldn’t be. Paying less of what you make (i.e. what you earn through hard, hard work) into a wasteful government system doesn’t make you a bad person.

There’s a reason everyone– regardless of income level– either hires an accountant or pays for the best tax software they think is available to reduce their tax liability.

If someone wants to pay more money in taxes, that person is either very patriotic, or very dumb.

What do you think of the new Tax Cuts and Jobs Act? Do you think it fairly administers tax cuts across the board? What could it do differently to make the system more fair or better?

 


Disclaimer: This article is not meant to be financial advice. For specific consultation regarding your situation, please consult with your local financial advisor.

Are My IRA Contributions Tax Deductible?

Most of the benefits of an IRA come into play during retirement, seeing as this is when you can start drawing money from the account. You can contribute to an IRA your entire working life but the key benefit of one only comes into play when you’re done working.

But that doesn’t mean there’s no benefits to contributing to an IRA when you are working.

So what are the benefits of contributing?

Those holding and contributing to a Traditional IRA can deduct their contributions to it from their taxable income. The person contributing can put in a maximum of $5,500 a year (indexed for inflation), and can deduct that amount from their taxable income.

Because you are deducting your contributions from your income, it means you are paying with before-tax dollars. This makes the growth more substantial in the account since you can put more into it without it being taxed in advance.

What if I have a Roth IRA?

Unfortunately for those contributing to a Roth IRA, you cannot deduct contributions from your income for tax. These contributions are made using after-tax dollars, meaning the growth in the account will be less substantial.

So why would I contribute to a Roth IRA?

Just because you can’t deduct the contributions to a Roth IRA from your income doesn’t mean this type of account doesn’t have any benefits.

Because you are paying into a Roth with after-tax dollars, you receive the distributions from the account tax free. This means that you pay tax to have the contribution entered into the account, but it grows completely tax free.

What you see in the account is completely yours, not the government’s.

So should I contribute to a Roth or Traditional IRA?

The answer to this question is going to come down to your income goals, your expectations of the growth in the underlying investments in the account, and whether you would rather save money on tax now or in the future.

A good alternative to choosing a Roth or a Traditional IRA is to choose both, which is something we will cover in a later post.

 


Disclaimer: The information on this page should not be construed to be financial advice. For advice regarding your specific situation, please contact your local financial advisor.

Did Your Paycheck Just Grow Thanks to the Tax Cuts?

There’s a lot of big stuff happening now in the wake of tax reform. Many companies have named wage hikes, bonuses, and other increased compensations for their workers in the wake of a new, 21% flat tax rate for corporations.

This is different than the old marginal tax rate structure that extended all the way to 35%. That’s a lot of money to pay, even for a big, greedy corporation! Considering most people in America work for corporations, perhaps cutting down on the tax may lead to bigger paychecks which will hopefully lead to economic growth.

But of course, you’re going to want to know how this change is going to affect you now, because there’s been a lot of changes on the individual side also.

So, Did My Paycheck Just Get Bigger?

Hopefully you’re working for one of the companies that generously announced big bonuses.

But if you’re not, no, you likely have not seen the change from the new tax reform hit your paycheck yet. And the reason for that is because the IRS is changing the withholding tax tables and the change is going to be taking effect February 15th.

Now, it may end up taking longer for your employer to play catch up, so you may want to give it a little while longer just to make sure.

My Paychecks Are Growing? But That Means I’m Going to Owe Tax at the End of the Year!

Not necessarily! The reason that the IRS is changing around the tax tables is because you’re expected to keep more of your money thanks to the Tax Cuts and Jobs Act and owe less in taxes.

To compensate for this, instead of just giving you more money back at the end of the year in the form of a refund, the IRS is just going to let you have more each pay period.

 


Disclaimer: The information on this page is not meant to constitute financial advice. For specific information regarding your situation, consult your local financial advisor.

 

What is Happening to the Standard Deduction in 2018?

A lot is changing this year (meaning next filing season) in regards to taxes, how they’re computed, and a lot of us in the industry are going to be playing catch-up when the dust finally settles.

But most people care about one thing when they hear the tax landscape is going to be completely different: How does this affect me?

I’m not going to tell you whether you’ll be paying more or less in taxes or getting a bigger refund (although best estimates puts it at about 75% of filers will see sizable reductions in their tax bill).

That’s not bad.

We’re not going to be talking about that, though. We’re only going to discuss one aspect of the bill, and that’s the standard deduction and what’s happening to it.

What is the Standard Deduction?

The standard deduction is one option you have if you do not itemize your deductions. Every year the amount changes because it is indexed for inflation.

However, it makes it so the first $X of the money you make is tax free. In the 2017 filing season, the standard deduction for most filers was $6300, but the amount changes based on your circumstances.

I Heard The Standard Deduction Was Going Away

A lot of things are going away next filing season, but the standard deduction is not one of them. In fact, the GOP wants to nearly double the standard deduction to $12,000. This means the first $12,000 of a single filer’s ($24,000 for married couples filing jointly) will be completely tax free.

And that is how most Americans will be getting that sizable tax cut this coming year.

But this is certainly a little ways away, and for now our concern is the current tax filing season and our current tax code.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.