This tax season is turning out to be a surprisingly challenging year for many Americans who expected a refund from their 2018 tax returns but didn’t get it. A change in the withholding tax rates for the year appears to have backfired. We all have been taking home bigger paychecks all year, but as we file our tax forms, we are finding that we owe much of the money back.
So even before dealing with the changes in tax laws for 2018, this is a year to get your tax house in order. Here are some tips to make the best of 2018 and get ready for 2019.
1. Hire a professional tax advisor.
Whether it’s taxes or travel, just because you can do something yourself, doesn’t mean you should. “Do not think you can be the expert in both travel and accounting. The rules in taxes change as quickly as the prices of air do!” said Suzanne Hair, owner of Travel Agent Suz. “Be an expert in what you do (travel) not in what the actual accounting expert does.”
2. Note the new small-business deduction.
New for 2018 is a 20 percent deduction on earned income for flow-through entities, including sole proprietors, partnerships and S corporations. If you earned $20,000 selling travel part-time, for example, you can automatically deduct 20 percent, or $4,000. Some income limitations apply, though.
3. Health insurance is no longer required — but if you pay it, deduct it.
The one big change in tax laws for 2019 is the repeal of the penalty for not having private health insurance coverage. “Now people can go without health insurance — but I certainly wouldn’t advise it,” says CPA Scott Boyar in Charlotte, North Carolina. For 2018, meanwhile, one of the most frequent errors of small-business owners is not deducting their health insurance premiums. (You also may be able to deduct life insurance premiums.)
4. Hold onto your receipts.
Perhaps the biggest mistake people make is believing that a credit card receipt is good enough backup for business expenses, Boyar says. If you are audited, you really do need to show an itemized receipt indicating exactly what you bought. It’s a very good idea to scan the receipts as well, as by the time you are audited, two or three years down the road, odds are the originals will be faded and illegible.
5. Rethink your T&E.
For the 2018 tax year, you no longer can deduct monies spent “entertaining” clients at events and shows. But you can deduct travel expenses and 50 percent of meals at which you talk business. Be sure to hold onto receipts for anything you spend to attend trade shows, fam trips, meetings and conventions, along with documentation proving that your travel was business-related, such as conference registration forms. (And when taking a personal or fam trip, set aside a few hours a day for site inspections and business meetings to turn it into a deductible business trip, suggests Roy Gal of Memories Forever Travel Group.)
6. Independent contractors who work from home can write off a portion of their house as a home office, but employees of an agency who are paid by W-2 cannot.
The simplified home-office deduction lets those who work at home write off their home office with little fuss. You can claim a flat $5 per square foot used in your office, up to a maximum of $1,500; or you can pro-rate the footage of your home offices vs. the square footage of the entire house. In either case, though, the home office must be used exclusively for work — so keep the gym equipment and guest bed elsewhere.
7. Don’t forget to expense your car.
When you use your car for work, you can take a standard deduction of 54.5 cents per mile for 2018, or 58 cents per mile for 2019 — but you have to keep a log noting where you went and why. (There are apps available that make this easy to do.) Those who loved record-keeping or have expensive cars can instead track and deduct the actual costs of gas, repairs, etc., based on the percentage of the time you drove the car for work.
8. Maximize your IRA deductions.
Why pay the IRS when you can pay your IRA instead? If you have not deposited the maximum to your retirement fund this year, do it by April 15 to claim the deduction this year. (A sole proprietor can put up to 25 percent of profits, to a maximum of $54,000, in an IRA.) If you are aged 59.5 or more, you can take the money right back out if you need it.
9. Safeguard your data.
Scammers love to access the Social Security numbers of unsuspecting folks and beat you to the punch by filing for your refund. Always use a secure server when filing taxes or sending information to an accountant, and make sure your accountant is equally careful about backing up and storing your forms. And do your taxes early, so you can file early if you are owed a refund, or wait until the last minute to file if you owe Uncle Sam.
10. Keep your business expenses separate from your personal ones.
Make it simple by using a separate credit card.
11. When the phone rings, ignore it.
Don’t be drawn in if you receive a call that purports to be from the IRS, and never give any information over the phone. The IRS only contacts taxpayers through the address on their tax forms.
12. Understand the difference between equipment and supplies.
Equipment (also called capital expenditures) typically includes things that do not need to be replenished every year, such as office furniture and computers. You can write off the cost of new equipment (up to $1 million) in one year, or depreciate it over time. Supplies purchased throughout the year, such as pens, paper, and ink, are written off in the year they are purchased.
Thanks to Scott Boyar, CPA, in Charlotte, North Carolina, for contributing his time and insights to help with this article.