Did you owe taxes this year?

Many people in the U.S. were frustrated this year by the amount they owed to the IRS. The Tax Cuts & Jobs Act was supposed to save taxes not increase them. First of all, it will help to understand payroll withholding and then how your balance due or refund is calculated.

Payroll withholding is how much your employer holds out of each paycheck and sends to the government to help pay your taxes for the year. Your employer looks at your paycheck amount and calculates how much your tax liability will be if you make the same amount all year. They withhold that amount from the paycheck. That’s why when your paychecks are large, your withholding might be really high.

Balance due or refund is calculated by your actual tax liability minus your payroll withholding for the year. At the end of the year, we add up what you actually made for the year, and then calculate the taxes on that amount of income. This is your tax liability. We then subtract your withholding amount from your tax liability to calculate the balance or refund.

The Tax Cuts & Jobs Act changed the withholding tables. When the tax laws were changed, the employers were given new withholding tables to hold out more or less of each paycheck. So, the idea was to enjoy more of your money during the year. I actually agree that getting a big refund isn’t ideal. I would rather use my money during the year. The government doesn’t pay you any interest. So, they get to use your money all year without paying you for it. Here are two options:

1. Leave your withholding as is, and save the money to pay your balance due. Divide your balance due from 2018 by how many paychecks you have left in the year, and save that money from each paycheck. Then, when you get your taxes done, you’ll be prepared to pay the money. Having the money planned and set aside empowers you to go get your taxes done early, and be able to say “I’m prepared.”
2. Change your withholding. The IRS offers a paycheck checkup on their website. You can go here and enter your information to know what to tell your employer to withhold from your paychecks. You calculate the exemption amounts. If you don’t think it will fix your amounts enough, talk to your employer about other options. You can claim less exemptions, you can withhold at the higher single rate, and/or ask your employer to withhold an extra percentage or amount from each paycheck.

Give yourself the power to understand taxes and you will feel better at tax time. Nobody really likes taxes but it is so much easier when you are prepared. Without getting too political, our taxes do pay for many incredible things like education, roads, and safety.

This guy says thank you.

Tax Preparation & Budget Consultations

I have 15 years of experience doing taxes. My practice is starting out so I charge $60 – $100 for most returns. Self-employment income, rental income, and other complicated returns rates will increase.

I also offer budget consultations. Let’s find a way to get you on track with a new budget for this year.

Contact me

(801)671-7192

erin@e3accounting.com

Big Refund? How to spend it?

Some people really enjoy tax time. They want their big refund from the government. This year, instead of rushing out to buy something you really want, I want you to consider some other great options.

1. Pay off some debt. Whenever I get a refund, this is my first option. If you pay an extra payment on a loan, it reduces the interest you pay by just a little. It also gets you one payment ahead. Then, if an emergency comes up later in the year, you might be able to skip a payment on this debt. Also, I think the best way to pay down your debt, is to spend extra money on it. Even ten or twenty dollars here or there, could pay off big at the end of a loan.

2. Start emergency savings. It is always a good idea to have 2-3 months of income in your emergency savings. However, start small. Don’t get overwhelmed. $1,000 of savings is a lot better than none. Whenever something comes up during the year, don’t hesitate to use this account. But, put the money back in as quick as you can. This should be a top priority to keep this at a consistent amount throughout the year.

3. Plan for the year. If your savings is good and you’ve been working hard on your debt, you could look forward to the year. If your insurance bill is due in the summer and you save money by paying it in full instead of monthly installments, start saving now. If you have needs that are coming this year, why not start a separate savings account for those items?

It is always tempting to run out and spend your tax refund. But, if your goals this year include getting your budget on track, receiving your tax refund is a great time to start. Budgeting doesn’t need to be overwhelming. Start with one goal at a time.

Personal and Business Expenses

When you own a business, expenses can quickly add up. Businesses should try to keep personal and business expenses separate. Sometimes, that proves difficult for small businesses. So, if you do keep expenses together, keep all business receipts. Then, make a notation or category for business expenses so you can easily find those at tax time. 

“Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated for a profit.” IRS Pub 535

Expenses should be ordinary and necessary. Ordinary means common and acceptable in your industry. The expense should also be appropriate and helpful. It is easy to find examples of expenses that the taxpayer disagreed with the IRS as to ordinary and necessary. 

For example, the IRS closely watches cell phone usage. You can only claim the business portion of expenses. So, you must calculate the portion of business usage because you likely use it for both.

“Generally, you cannot deduct personal, living, or family expenses.” IRS Pub 535

You should be careful to save receipts from large retailers, i.e. Costco, Amazon. In an audit the IRS will generally want proof that these expenses are for business purposes. 

Some additional expenses that can be tricky include:

• Business Use of Home. If you use part of your home for business, you may be able to deduct expenses. The area of your home must be used regularly and exclusively for business. Calculate the percentage of your home used for business and then you can deduct this portion of mortgage interest, insurance, utilities, repairs, and depreciation. 
• Business use of your car. If you use your car for both personal and business purposes, you must divide expenses based on actual mileage. Look at my post on this subject for more information.
• Interest. If you borrow money and use part of the money for personal and part for business, figure out a percentage for each and only deduct the business portion of the interest you paid.

Always be careful when claiming expenses that they are for business purposes. In the weeks to come, I will add more information to help you complete most of your own accounting.