It is no secret that taxes can be complicated and stressful. For many, it is even more complicated this year with the recent changes to the tax rules under the Tax Cuts and Jobs Act (TCJA). Fortunately, starting to prepare for tax season well before the deadline can help you – and your business – save money. Here are five smart moves you should consider for the 2019 tax season.
1. Keep Your Records And Bookkeeping In Check
According to the IRS, “most taxpayers are disorganized and unprepared when they begin to file their returns.” Don’t make that mistake and get your records and books in order. You may want to consider using a financial management software, such as Finbooth, to keep track of your finances. Make sure that you have accurately recorded all of your transactions, balanced your books and reconciled your bank accounts. You may also want to consult with a certified accountant to review your books and ensure that all transactions were properly recorded. Instead of collecting paper receipts, consider electronic storage of your records. If you are using Finbooth, you can store and organize your records electronically so that you are better prepared for tax season.
2. Track Your Income
As you may have heard, the tax rates for personal income were changed under the TCJA. The new tax rates and brackets are provided in this IRS article. The amount of tax you owe the government will depend on your income, filing status and deductions. You may have several sources of income and will require you to track down the applicable forms. Common forms include W-2s from employers, 1099 forms for other sources of income such as self-employment, retirement distribution and investments, and K-1s for entities for which you have an ownership interest, such as S Corps, LLCs, and partnerships, if any. Other sources of income include social security benefits, state and local income tax refunds, rental property income, unemployment income, property sale income, among others. Moreover, if you are a business owner, you will need to have a complete accounting record of your business income.
3. Choose Between Itemized and Standard Deductions
The TCJA increased the standard deduction from $6,500 to $12,000 for individuals, from $9,550 to $18,000 for heads of households, and from $13,000 to $24,000 for married couples filing jointly. With the increased standard deduction, many will not have enough itemized deductions to exceed the applicable threshold or will merely select the standard deduction for a simpler tax filing.
Depending on your financial situation, you may choose to rely on itemized deductions if you can exceed the applicable threshold. Potentially tax-deductible expenses include mortgage interest, property taxes, educational expenses, student loans, charitable contributions, and medical costs not covered by insurance or reimbursed by any health plan, among others. Consider using the bunching method to accumulate deductions in order to surpass the threshold. Bunching is a way of combining home mortgage interest, state and local taxes, charitable donations, and other deductions before the end of 2018, so that the combined itemized deductions may potentially exceed the standard deduction threshold.
New changes in the tax code under the TCJA have eliminated some deductions and capped others. For example, deductions for personal state and local property taxes and personal state and local income taxes are now capped at a combined total of only $10,000 ($5,000 if you use married filing separate status). Meanwhile, you can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). Read up on tax reform and/or consult with an accountant to learn more on what you can and cannot itemize.
4. Track Your Business Expenses and Deductions
Under the TCJA, pass-through entities, such as LLCs, S Corps, partnerships and sole proprietors, may be able to deduct up to 20% of their qualified business income. However, the deduction phases out, and there are some limitations on (a) what type of business services are qualified for such deduction and (b) what business expenses are deductible. For example, business expenses such as client entertainment expenses (used to be 50%, is now no longer deductible), business snacks and meals (used to be 100% deductible, is now 50% deductible), and employee transit and parking benefits (used to be 100% deductible, is now no longer deductible). You can also deduct more for car depreciation. Because these new tax rules are complicated, you should consult with a tax professional to help you navigate through and take full advantage of the permissible deductions under these new tax rules.
5. Take Advantage of Helpful Online Resources
There are several helpful resources to help you understand the tax issues that can affect your financial situation. Even if you are using an accountant, consider reading up on the new tax rules under the TCJA to make informed decisions about your finances and reduce your tax liability. For additional details, check out these guides from the Tax Policy Centre, the Good Financial Cents and the Iowa State University. Also, the IRS has a great tool, referred to as the Interactive Tax Assistant, that provides answers to some common tax questions.
Tax preparation can be a hassle. Follow these 5 smart moves to ensure that you are not missing out on any tax benefits. In view of the new tax rules under the TCJA, consider consulting with a tax professional to help you determine the best tax strategy for your specific financial situation. Finally, as you prepare for tax season, know that Finbooth is here to enhance your business operations, help you manage your finances, and connect you with certified accountants.
Information contained in this post does not constitute legal, business, or tax advice. Please contact your financial or legal advisor for information specific to your business. Finbooth assumes no liability for actions taken in reliance upon the information contained in this post.