PF SMS icons. PF SMS icons. Income Tax Tips for Personal Finance Managers Working with Military Families. learn.extension.

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1 PF SMS icons PF SMS icons Income Tax Tips for Personal Finance Managers Working with Military Families learn.extension.org/events/3191 This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Military 1 Family Readiness Policy, U.S. Department of Defense under Award Number

2 MFLN Intro Connecting military family service providers and Cooperative Extension professionals to research and to each other through engaging online learning opportunities militaryfamilies.extension.org Sign up for webinar notifications at militaryfamilies.extension.org/webinars

3 Dr. Barbara O Neill Today s Presenters Rutgers Coopera-ve Extension s Specialist in Financial Resource Management Outreach Coordinator for the Personal Finance concentra-on area of the Military Families Learning Network. Taylor Spangler Family Consumer Science Extension Program Coordinator at the University of Florida. Coordinator for the Florida Master Money Mentor, Volunteer Tax Assistance, Financial Ambassadors and the Florida Saves programs. 3

4 Webinar Objectives Present information on the following topics: Federal Income Tax Background Features of the Tax Cuts and Jobs Act Resources about taxes and the Tax Cuts and Jobs Act The tax filing process Income tax filing errors and opportunities Resources for income tax preparation Income tax identity theft

5 Question 1: What are the most frequent tax questions that you get from clients?

6 Income Tax Background Photo by Barbara O Neill

7 Background: Major Taxes Paid in the U.S. ΠTaxes on Purchases Sales tax and excise tax (e.g., gas, cigarettes) Taxes on Property Real estate property tax Personal property tax Taxes on Wealth Federal estate tax State inheritance tax Taxes on Earnings Income tax and Social Security tax

8 Background: The Progressive Nature of Federal Income Tax Progressive tax Takes a larger percentage of income from high-income taxpayers than low-income taxpayers. Federal income tax Regressive tax Takes a decreasing percentage of income as income increases. State sales tax

9 Background: Marginal Tax Rate Is Applied to the Last Dollar Earned Marginal Tax Bracket (MTB) Income-range segments that are taxed at increasing rates as income goes up Marginal Tax Rate The tax rate applied to your last dollar of earnings Established by Congress and change periodically 2018 Federal Marginal rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%

10 Background: Tax Credit Versus Tax Deduction $100 Tax Credit Reduces Your Taxes by $100 $100 Tax Deduction Amount Your Taxes are Reduced is Based on Your Tax Bracket Example: $5,000 x.22% mtb = $1,100 of tax savings; $3,900 net cost

11 Background: Types of Deductions Deduction = An amount subtracted from gross income to reduce the amount of income subject to tax. Standard Deduction- Amount established each year by tax code; no need to itemize deductions; amount is based on a taxpayer's filing status, age, etc; no receipts needed Itemized Deduction- Specific amounts spent on certain goods and services throughout the year; allowed deductions are outlined by the IRS and include such expenditures as mortgage interest and charitable donations Deduction-Calculator/ (Mortgage tax deduction calculator) 11

12 Background: Itemizing Required for Charitable Gift Benefits If you claim the standard deduction on your tax return, charitable gifts will not provide a tax benefit Psychic benefits of giving to charity are another issue You must itemize expenses on Schedule A to deduct charitable donations. Donors' deductions are limited to 50% of adjusted gross income; rollover of excess for up to 5 years

13 Background: Refundable and Non-Refundable Tax Credits Refundable: When tax credits are greater than the amount of tax you owe, the IRS sends you a tax refund for the difference Example: Earned Income Tax Credit (EITC) Non-Refundable: Credit can t be used to increase your tax refund or to create a tax refund when you wouldn t have already had one. In other words, your savings cannot exceed the amount of tax you owe. Example: Child and Dependent Care Expenses Credit

14 Background: Earned Income Tax Credit Credit paid to low- and moderate-income workers with qualifying child(ren) or, in some cases, no children Maximum EITC credit on 2017 tax returns is $510 with no children $3,400 with one qualifying child $5,616 with two qualifying children $6,318 with 3+ qualifying children

15 EITC Income Limits (2018) Adjusted gross income (AGI) must each be less than: $49,298 ($54,998 married filing jointly) with three or more qualifying children $45,898 ($51,598 married filing jointly) with two qualifying children $40,402 ($46,102 married filing jointly) with one qualifying child $15,310 ($21,000 married filing jointly) with no qualifying children

16 Background: Child Tax Credit A $1,000 credit is available for each qualifying child under the age of 17 claimed as a dependent (2017) The Child Tax Credit is non-refundable The Child Tax Credit will rise to $2,000 per qualifying child in 2018 Up to $1,400 per child is refundable

17 Background: Child and Dependent Care Credit Available for workers who pay employment-related expenses for the care of children or other qualified individuals (e.g., incapacitated spouse) while they are working, seeking work, or in school full time The total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for 2+ qualifying individuals)

18 Background: Saver s Credit (Retirement Plan Savings)

19 Background: Completing the Federal Income Tax Return Filing status Income Adjustments to income Tax computation Tax credits Other taxes (such as from self-employment) Payments (e.g., withholding and estimated payments) Refund or amount you owe Refunds can be directly deposited to a bank account Payments may be directly debited from a bank account Signature (most common filing error)

20 Background: Tax-Rate Schedules and Tax Tables Tax-Rate Schedules Used by filers with a taxable income of $100,000 or more; requires a mathematical computation to determine tax liability Tax Tables Used to look up one s tax liability according to tax filing status and income range

21 Federal Income Tax Table Filing Status Taxable Income Tax Liability

22 Background: Tax Withholding

23 Background: Impact of W-4 Form Decisions on Net Pay 0 allowances = max taxes deducted* = Smaller take home pay = Larger tax refund + allowances = less taxes deducted = Larger take home pay = Smaller tax refund NOTE: Taxpayers can add extra withholding beyond 0 allowances; e.g., +$50 more

24 2018 Tax Withholding

25 General Tax Planning Strategies to Minimize Taxes If you expect Then you should Because The same or a lower tax rate next year The same tax rate next year A higher tax rate next year Accelerate deductions into this year Delay income into next year Delay deductions Accelerate income Greater benefit to higher rate Delay paying taxes Greater benefit Taxed at lower rate

26 Background: Alternative Minimum Tax (AMT) Paid by taxpayers with high amounts of certain deductions and various types of income Designed to ensure that those who receive tax breaks also pay their fair share of taxes Has increasingly been affecting less affluent taxpayers, especially in high-tax states (e.g., NJ) A high proportion of long-term capital gains to ordinary income can trigger the AMT

27 Background: Tax Avoidance and Tax Evasion Tax Avoidance (Minimization) Legitimate methods to reduce your tax obligation to your fair share but no more (e.g., deductions, credits, tax-deferred/tax-free investing) Tax Evasion Illegally not paying taxes you owe, such as not reporting all income or overstating deductions

28 Question 2: What questions/comments are you getting about the new tax law (TCJA)?

29 Federal Marginal Tax Rates: 2017 and 2018

30 Tax Cuts and Jobs Act Photo by Barbara O Neill The Tax Cuts and Jobs Act was passed by the U.S. Senate and House of Representatives in late December 2017 and signed by President Trump on December 22, This law will impact individual taxpayers and businesses on a scale that has not been seen in over 30 years.

31 Tax Cuts and Jobs Act #1 Eight year period of lower individual tax rates from 2018 through 2025 with seven temporary tax rate brackets ranging from 10% to 37% Chained CPI (consumer price index) will be used for future indexing, resulting in lower inflation adjustments than the previous CPI Elimination of personal exemptions (from ) Nearly double the standard deduction ($12,000 for singles and $24,000 for married couples filing jointly in 2018)

32 Tax Cuts and Jobs Act #2 $10,000 cap for state and local tax (SALT) deductions (e.g., state income tax and municipal property tax) for taxpayers who itemize Repeal of all miscellaneous deductions that were previously subject to 2% of adjusted gross income (AGI) floor (e.g., union dues, uniform expenses, unreimbursed business expenses, tax prep fees) Enhanced child tax credit of $2,000 per qualifying child; $1,400 of the credit is refundable The Affordable Care Act shared responsibility payment remains in effect for 2017 and 2018 and is $0 beginning in 2019

33 Tax Cuts and Jobs Act #3 Lower medical expenses deduction threshold of 7.5% of AGI for tax years 2017 and 2018 Retains the alternative minimum tax for individuals with higher AMT exemption amounts from 2018 through college savings plan distributions can be used (within the annual limit of $10,000 per student) for private elementary and secondary school expenses and homeschooling expenses Alimony is no longer deductible by spouses who pay or taxable to recipient spouses for divorce decrees signed after December 31, 2018

34 Tax Cuts and Jobs Act #4 The moving expense deduction is suspended from 2018 through 2025 with the exception of the moving and storage expenses of service members Interest on home equity loans no longer deductible from ; no grandfathering for existing home equity loans Tax-deductible interest is capped on mortgage debt (called acquisition indebtedness) up to $750,000 on new mortgages; for mortgages taken out before December 15, 2017, the previous $1 million debt limit for mortgage interest remains The estate tax exclusion was raised to $11.2 million for individuals and $22.4 million for married couples (with proper planning to double the individual exemption; i.e., portability) from 2018 through 2025

35 Military Income Tax Issues Photo by Barbara O Neill

36 Included and Excluded Income Included Active duty pay Special pay for foreign duty (not in combat) Hardship duty pay Enlistment/reenlistment bonus pay Hazardous duty pay Excluded Combat zone pay Disability compensation SEGLI benefits received for death Family separation pay Per diem travel allowances, moving allowances, and BAH

37 Other Military Tax Rules While combat pay is nontaxable, it IS included for the purpose of calculating limits on contributions and deductions for an IRA Home sale profits: Exceptions to standard ownership and use tests during the 5-year period prior to the sale: two of the preceding 10 years prior to the sale Residency for tax purposes is the state a service member claims as home (typically where enlisted) Military spouses can file in resident state or duty station state; need to compare options

38 Other Military Tax Rules Moving expense tax deduction is still in effect for active duty service members (or spouses/dependents) pursuant to a military order or PCS Standard 4/15 deadline unless in a combat zone or stationed outside the U.S.; 180 days after tour ends Resource: IRS Publication 3: Armed Forces Tax Guide:

39 Income Tax Resources Photo by Barbara O Neill

40 Recommended Resource The Bible : Annual Limits Relating to Financial Planning (College for Financial Planning):

41 Federal Tax Rates Rutgers Cooperative Extension Tax Information web page:

42 Nerd s Eye View Blog Post For a through description and analysis of the Tax Cuts and Jobs Act, review the blog post Individual Tax Planning Under the Tax Cuts and Jobs Act written by Michael Kitces.

43 TCJA Tax Law Calculators Tax Bill Calculator: Will Your Taxes Go Up or Down? (The New York Times): em_pos=small&emc=edit_up_ &nl=upshot&nl_art=0 &nlid= &ref=headline&te=1 Tax Calculator: What Tax Reform Means For You (Fox Business): Be sure to check the underlying assumptions! You will get a rough estimate-not an exact number

44 The Final GOP Tax Bill is Complete. Here s What Is In It (The Washington Post): TCJA Tax Law Resources Congress Passes Sweeping New Tax Legislation (Iowa State University): Details of the Conference Report for the Tax Cuts and Jobs Act (Tax Foundation): Preliminary Details and Analysis of the Tax Cuts and Jobs Act (Tax Foundation): Tax Cuts and Jobs Act Summary (CCH Incorporated and Wolters Kluwer):

45 Question #3: Any Other Good Income Tax Resources?

46 What s New in 2018? Disaster Tax Relief and Airport and Airway Extension Act of 2017 Eased casualty loss rules, eased access to retirement funds, and charitable retention tax credit for victims of Hurricanes Harvey, Irma and Maria

47 UF/IFAS Extension Photo courtesy of IFAS Extension

48 From Our VITA Tax Sites Opportunities for savings Split Your Refund Savings bonds Debt pay down Personal investments/ improvements

49 Observations From Our VITA Balance free tax prep message and volunteer-based program with IRS- Certified Preparers Emphasize refund accuracy Tax Sites

50 Questions From Our VITA Tax Questions Healthcare forms New tax law Misconceptions Sites Taxpayer focus on deductions only taken when itemizing 1099 underpayment

51 Question 4: What are some common misconceptions about taxes or tax errors?

52 VITA Free Tax Prep Options (includes installation program directory) AARP aarp_taxaide/

53 Free File Software options 12 software companies provide a free federal return to active military personnel with an AGI of $66,000 or less. Finder lists income, residency, and age restrictions From $33,000- $66,000 maximum AGI Some states excluded index.jsp

54 Know Before You Go Valid photo identification Social Security cards and birth dates for you, your spouse and dependents Your wage and earning forms, such as Forms W-2, W-2G, and 1099-R W-2 forms are usually available for military members by the end of January and can be downloaded from MyPay website Interest and dividend statements (Forms 1099)

55 Know Before You Go Other relevant information about your income and expenses E.g., total amount you paid for child care and the provider s identifying number (usually an Employer Identification Number or Social Security number) A copy of your last year s federal and state tax returns, if available Routing and account numbers for direct deposit of your tax refund

56 Opportunities to Save Typically measured by Form 8888 split Positive financial behaviors include paying down debt or transportation/ housing/ education investments Tax Time savings tips Make it personal, build on trust Use anchor points Mention several times

57 Question 5: What are your thoughts on over-withholding?

58 Refund Timing The IRS issues most refunds within 21 days Check status of refund at EITC/ACTC hold

59 Refund Timing Refund anticipation loans/ checks are interest-bearing loans

60 Question 6: How do your service members use their tax refunds?

61 Extensions File Form 4868 by April 17 th, 2018 to receive a 6-month extension (October 15 th, 2018). Interests accrues on unpaid tax The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by April 17, It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%.

62 Combat Zone Extension Additional time to file if you are stationed overseas or serving in a combat zone Deadlines extended for the period of service, plus 180 days Applies to service members and those working in support of/ under direction of U.S Armed Forces

63 Combat Zone Pay Considerations EITC: While combat pay is nontaxable, service members may elect to include it as earned income it to qualify for the Earned Income Tax Credit, which may decrease tax liability and could increase refund IRA: Combat pay is tax-free, but service members can contribute to a Roth or Traditional IRA

64 Filing After ID Theft File a complaint with the FTC at identitytheft.gov Contact credit bureaus to place a fraud alert on your credit records Contact your financial institutions If SS# was compromised, complete IRS Form 14039, Identity Theft Affidavit

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66 17.6 million iden-ty thee vic-ms in 2014 (7% of US popula-on)* Over 370,000 complaints to the FTC in *U.S. Dept. of Jus-ce, Bureau of Jus-ce Sta-s-cs, Vic-ms of Iden-ty TheE, 2014 (September 2015)

67 What Is Tax Iden=ty The?? Filing a fraudulent tax return using another person s Social Security number Claiming someone else s children as dependents Claiming a tax refund using a deceased taxpayer s informa-on Earning wages under another person s Social Security number

68 Short-term Trends Between 2016 and 2017: Total iden-ty thee complaints down 7% Tax iden-ty thee complaints down 46% IRS imposter scam complaints down 54%» Consumer Sen+nel Data

69 Id The? Complaint Trends Total Number of Iden=ty The? Complaints 290, , , , ,157 Consumer Sentinel Data

70 Scope of the Tax Id The? Problem Percentage of Id TheE Complaints that are Tax-related % 45% 33% 22% Consumer Sentinel Data

71 How Does Tax Iden=ty The? Happen? Lost or stolen wallets, Medicare cards, smartphones TheE by family, friends, visitors, advisors Dumpster diving Stolen mail or tax returns Imposter scams Corrupt insiders Corrupt tax prepara-on services

72 How Does Tax Iden=ty The? Data breaches Happen Online? Phony s from imposters Unsecure Wi-Fi hotspots Peer-to-peer file sharing Downloading soeware or apps from unknown sources

73 Warnings Signs of Possible Tax Iden=ty The? Social Security number is lost, stolen, or compromised Unusual delay in gebng a refund IRS no-fica-on: duplicate tax return filing unreported income duplicate dependents

74 Who? Tips to Minimize Your Risk of Tax Iden=ty The? Know your tax preparer When? File first: beat the crooks. File your returns as early in the tax season as possible How? If mailing, do not put tax returns in outgoing mail; mail tax returns directly from the post office If filing electronically, use a secure network Store returns securely and shred draes

75 Reducing the Risk of Iden=ty The? Protect what you have Minimize personal informa-on in wallets or on smartphones Keep personal informa-on secure - locked Be careful what you share Don t give info unless you know who s asking and why Don t click on links sent in unsolicited Monitor Review mail and financial statements Annualcreditreport.com Dispose properly Shred

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87 Iden=ty The? Free print materials to order:

88 Ques=ons?

89 PF SMS icons PF SMS icons Connect with MFLN Personal Finance Online! MFLN Personal Finance MFLN Personal 89

90 Evaluation and Continuing Education Credits/Certificate MFLN Personal Finance grants 1.5 credit hours for today s webinar for AFC-credentialed participants through AFCPE and CPFC-credentialed participants through FinCert. Please complete the evaluation and post-test at: SV_ex7v1qUkztKZntH Must pass post-test with an 80% or higher to receive certificate. 90

91 MFLN Personal Finance Upcoming Event Getting to Know You: Introducing Personal Finance Managers to Cooperative Extension and to Each Other Tuesday, March 27, :00 am 12:30 pm Eastern Location: learn.extension.org/events/3243 For more information on MFLN Personal Finance go to: militaryfamilies.extension.org/personal-finance 91