As final deadline approaches for taxes, here are a few observations I have from my CPA/tax preparer job about this tax season:
1. More people seem to be owing tax, even lower income taxpayers.
2. Many people are being paid as independent contracters instead of as employees. This is explanation for some of the people who are severely underpaid at tax time. Self-employment tax is hurting even more than the income tax for lower paid people. Self-employment tax6 (15.3%) starts at first dollar, no standard deduction or exemptions apply
3. I have been helping people set up payment plans using Form 9465 Installment Agreement Request. This form can be efiled with the return and set up payments at a low interest rate over an extended time period.
4. Education credits continue to provide some relief for college costs for parents. However, dependent rules for college kids cause problems as many college kids claim themselves and cause the family to miss out on the education credit. Usually it is best for the parents to claim the college student and get the exemption and education credit as the college student typically does not have much income or tax.
5. IRA and 401k rules are complicated and cause confusion and mistakes due to the complexity.It is easy to overcontribute due to income limits, more than one employer, or tax rules. Have had multiple clients with excess contributions to IRA's or 401k's that had to have the excess amounts refunded. Also IRA rollover rules are complex and misunderstood.
6. Another common issue is the newly married couple who find their taxes change due to combining incomes. Often this puts them in a new tax bracket.
7. Two earner married couples must plan their withholding carefully as the second income puts them in a higher tax bracket. This could lead to underwithholding. Usually they will need to adjust their W-4's to provide for some additional withholding.
8. Dependency issues with divorced families are very complicated. The default is that the custodial parent claims the exemption. Support is not the relevent factor. In addition to the dependent exemption, child tax credit, earned income credit, and child care credit (daycare) as well as education credittall are related to the parent who claims the dependent. Planning and/or negotiation is important with respect to these issues. The custodial parent can file a tax form to give the dependent exemption to the non-custodial parent on a year by year basis.
I will have a Part II on some more tax time observations in a post later this week.
Patty EST Grand Rapids Michigan (yes same time zone as Maine)
If the first thing you do when you wake up in the morning is eat a live frog, then nothing worse can happen for the rest of the day!" Mark Twain
It is not enough to take steps which may some day lead to a goal; each step must be itself a goal and a step likewise. Johann Wolfgang von Goethe
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