Taxes can often be a confusing topic, especially with the new tax reform, so we thought we’d sit down with an accountant and allow him to shed a little light on the topic.
We here at Fit, Wealthy, & Wise recently had the opportunity to sit down with Nse Udonta. Now you are probably wondering who that is? Mr. Udonta is an accountant in southeast Texas and works for a private accounting firm. He graduated with his masters in accounting in 2015 and is currently pursing his CPA certification.
Taxes are really intimidating and we never learn about them in school; can you simplify what taxes are for us?
Benjamin Franklin once said, “in this world nothing can be said to be certain, except death and taxes.” Wherever governments are set in place, taxes are sure to follow. Taxes essentially are the government’s method of collecting revenue. The revenue is necessary to support vital functions such as the construction of roads and schools. It also allows for government employees to receive payment for their services. In the United States, taxes are collected in a variety of ways. The most common form of tax collection is found in the individual income return or Form 1040. You are required to file a 1040 return depending on the gross income earned within your filing status and age group. The table below further illustrates:
|Filing Status||Age Group||Gross income (must file if you made this amount within a given year)|
|65 or older||$11,950|
|Head of Household||Under 65||$13,400|
|65 or older||$14,950|
|Married filing jointly||Under 65 (both spouses)||$20,600|
|65 or older (one spouse)||$21,850|
|65 or older (both spouses)||$23,100|
|Married filing separately||Any age (if your spouse itemizes deductions than only $5)*||$4,500|
|Qualifying widow(er) with dependent child||Under 65||$16,750|
|65 or older||$18,000|
*Itemized deductions explained below
What paperwork do I need to have before I begin my taxes?
You will need to have:
- Copies of any documents that specify amounts of income earned in the prior year. These can come in the form of W-2s, 1099s, and K-1s.
- Receipts of expenses that are deductible. In other words, expenses that can be used legally to lower your tax liability. (Ex. Property tax statements, mortgage interest statements)
- Charitable contribution statements signifying that you did not receive tangible benefits in return for donations (or tithe paid to a church)
- HUD statements from the purchase or sale of a home (if you bought or sold a home)
- Documents pertaining to the sale or purchase of a vehicle (same as above)
- Health insurance coverage information
What benefit do I get by going to an accountant to do my taxes versus doing them by myself on a program like TurboTax?
This really depends on the complexity of your tax situation and your schedule. If you have few sources of income and time on your hands, you are better off using software like TurboTax. These programs are relatively inexpensive and do a reasonable job of walking you through the process of preparing basic returns. However, if you receive income from various sources in addition to your regular job (i.e. Investments, sale of property, rental income) and are strapped for time, you may find it better to utilize the services of tax professionals. Although this option is costlier, tax professionals are better qualified to handle complicated tax issues, and can give advice on how to legally reduce your tax liabilities.
I hate seeing my paycheck dwindled down before it hits my bank account, how can I legally reduce my taxes?
If you are seeking to lower your tax liability, it is important for you to understand the difference between standard and itemized deductions. Standard deductions are set dollar amounts that reduce your taxable income. These amounts vary depending on your filing status, and can change from year to year. In 2017, the standard deductions were as follows:
|Filing Status||Standard Deduction|
|Single or married filing separately||$ 12,000|
|Married filing jointly or qualifying widow(er)||$24,000|
|Head of household||$ 18,000|
On the other hand, itemized deductions are qualified expenses that can be used to lower your taxable income. Examples of qualified expenses include:
- Property taxes paid
- Mortgage interest paid
- Unreimbursed employee business expenses
- Uninsured casualty losses
- Large charitable contributions
You can choose between the greater of the standard or itemized deduction. Most people will end up using the standard deduction simply because they do not have enough expenses to itemize. However, if you have many itemized expenses, you should take advantage of this deduction. Please note that your itemized deductions may be limited if your adjusted gross income exceeds a threshold amount (dependent on filing status). In 2017 the threshold amounts were:
|Filing Status||Threshold Amount|
|Married filing jointly or qualifying widow(er)||$313,800|
|Married filing separately||$156,900|
|Head of household||$287,650|
Another way to lower your tax deduction is to take advantage of traditional and Roth IRAs. These investment plans can provide you with tax breaks depending on the timing and type of your contribution. For instance, contributions to a traditional IRA are tax deductible while ones made to a Roth IRA have no tax effect. When you withdraw money from these accounts, there are different effects. Money withdrawn from a Roth IRA is tax-free but money taken out of a traditional IRA is taxable.
People always seem to be saving receipts for tax purposes, what does that mean and should I be doing that for my taxes?
As I mentioned earlier, itemized deductions can be used to lower your tax burden. It is important to remember that the IRS can always audit your tax return. This is why it is beneficial to keep receipts and documentation of various expenses that you may incur within a given year. If the IRS ever questions you for the itemized deductions that you take, your receipts are the proof that you need to show that you are not committing any fraud.
For additional information on taxes and the treatment of tax issues, you can visit the IRS.
Thank you Mr. Udonta for sitting down with Fit, Wealthy, & Wise, we really appreciate the education you provided our audience.
Have any questions? Let us know about them in the comments section.