Americans are used to the pressure of filing taxes, making sure that everything is in order and exactly where it is supposed to be. We’re also used to dealing with new tax laws, but this year, there are at least 7 new laws that could change everything you’ve come to expect from your bank account when planning for your taxes.
If you’ve already started gathering information to file your taxes, congratulations! Starting early and being thorough is the best way to ensure that you get the refund you deserve. But, understanding all of the most recent changes to the tax system is crucial; file incorrectly, and you may find yourself audited and in hot water with the IRS. You might even put yourself at financial risk — depending on the issue.
Tax Refund Delays
Relying on a tax refund to get you through the spring? You may want to re-evaluate your approach. This year’s refunds will be delayed for as many as 40 million Americans. As a direct result of changes to the tax and reporting system, the working poor are the ones most likely to experience delays. Unfortunately, the delay may also impact the Child Tax Credit, leaving thousands of single and dual-parent families in a lurch. The goal is to give the IRS more time to screen returns for potential issues like fraud, duplicate entries, incorrectly filed information, and other high-cost mistakes.
Thinking that gives you more time to submit your taxes? Guess again. You still have to file by Monday, April 17. Delay your filing, and you may find yourself audited and fined by the IRS, negating any refund you may have received in the first place.
Those receiving refunds should expect the delays to last for quite some time. IRS agent Dan Thomas speculated that processing could extend well into June. Though the number of affected Americans is around 12%, the delay is likely to hit those who desperately need the refund for everyday expenses most – the working poor.
Increased Penalties for Those Without Health Insurance
Avoiding health insurance because it’s too costly, or even just because you think you don’t need it? You could be putting yourself at significant financial risk. New tax laws dictate an increased penalty, if the IRS discovers the truth about your status first. You can expect a hefty fine of as much as $695 for individuals, a number that can triple if your family contains three people or more.
To add insult to injury, if you happen to make over $100,000 a year (either as a single income or dual income), the amount you may be required to pay could be as much as 2.5% of your total income. On a $300,000 salary, that works out to a fine of a whopping $7,500 dollars at tax time – enough to break the bank and eat up any refund you may have otherwise been entitled to.
Tuition and Education Expenses Credit – Use It Or Lose It
Paying for your children to attend college? You may be entitled to tuition and education expenses credits on your income tax report, but only if you file before the end of this filing year. The Tuition and Fees deduction disappears after this year, meaning that if you don’t use it now you won’t be able to use it next year, either.
So exactly what qualifies as a tuition or education expense credit? The list of potential exemptions isn’t exactly lengthy, but it does cover most related items, including:
- Tuition for any full semester or period
- Unrefunded amounts if the student withdraws
- Tuition or fees, even if paid via a loan
- Related expenses (including books, equipment, and supplies)
- Prepaid expenses (provided they were for the 2016 tax year)
If you were considering including student-related expenses on both parent’s taxes, or on your business taxes, you should know that this is strictly disallowed. Considered double-dipping, it’s a red flag for an audit from the IRS and could result in you having to pay back the money in an overpayment. File education expenses only once, and never on multiple individual tax reports. If you spot an error after filing, let the IRS know immediately to avoid hefty fines.
Senior Medical Expenses
If you’re over the age of 65, and you have significantly costly medical expenses throughout the year, you can claim those costs against your return. Until the end of this filing year, you could do so whenever you were able to demonstrate that your medical costs were higher than 7.5% of your adjusted gross income (AGI). After this year, the number increases to 10%, resulting in a significant difference for filers with high medical expenses throughout the year.
Should you file using the old tax law or the new tax law? For your 2016 taxes, stick with the 7.5% deduction when itemizing, if you qualify. But be sure to check the IRS website and verify exactly what qualifies; expenses like prescription drugs and medical insurance premiums are a go, but general health and cosmetic surgeries may not be covered. Furthermore, there are limitations on exactly what you can claim for each expense; for example, long-term care premiums have a limitation amount of approximately $3,800 to $4,700 per year.
For seniors struggling with serious chronic or acute illnesses, including medical expenses the right way can provide a significantly higher amount of money on your return. For this year only, you can use the 7.5% rate as long as you are 65 years of age or older. If you choose not to file your medical expenses this year using the 7.5% deduction rate, you won’t be able to carry that unused amount over to next year.
Increased Equipment Purchase Deductions for Business
Running a major business on American soil? If you spend more than $500,000 this year on equipment improvement for your business, you should know that the amount you can claim on your taxes has increased to match the rate of inflation. Instead of a $500,000 limit, the new limit is now $510,000 – a potential savings of $10,000 if you itemize the purchases correctly.
What’s included are items like vehicles, computers, manufacturing machines, and furniture, netting business owners a significant savings, if they file and itemize each object correctly before the tax filing date. But, don’t assume any equipment qualifies; standard improvements and appliances often fall under a different categorization. For example, you can’t claim air conditioning equipment like mini-splits, ductwork, furnaces, air conditioners, miscellaneous air quality equipment, or any on-site landscaping under the deduction. These may fall under other tax laws instead.
Property is often the most confusing item to claim in this regard, as the purchase of property doesn’t qualify under the new tax laws. Instead, it falls under Section 946 (Depreciated or Listed Property). If you have expenses related to property or real estate that don’t qualify, follow the guidelines listed here.
CEOs Lose More Money
If you’re a CEO of a medium to large business who is making approximately 100 times the money your baseline employees are making, you’ll have a higher taxation rate on this year’s return – but only if you live in Portland, Oregon. Considered draconic and extreme by many fiscal conservatives, the new CEO Tax law stipulates that people who fall under the qualification must pay not only the traditional 2.5% business income tax rate, but an additional 10% surcharge on top of it.
Making more than 250 times the amount of your entry-level employees? The news may be worse. You can expect a surcharge of as much as 25% on top of the 2.5% tax rate. All-in, that’s a whopping tax rate of 27.5% of your total business income. CEOs who own multiple companies or multinational corporations are most likely to take the hardest hit here, losing out on income from multiple sources rather than just one.
The move to tax higher-paid CEOs was pushed forward as a way to eliminate income equality, but some businesses have stated that all it’s likely to do is harm the economy in the end. High-end CEOs are unfortunately likely to pass that loss down to the company in the form of budget cuts, some of which may reduce the total number of jobs located in Portland. With other states providing CEOs with greater income possibilities, it paints a potentially grim picture for Portland as far as competing for businesses goes. Conservative estimates state that at least 500 major corporations in Portland stand to lose out with the new law, including WalMart, General Electric, and several other Fortune 500 companies.
Social Security Minimums Rising Dramatically
In 2017, new social security minimums will rise dramatically for approximately 12 million Americans. That’s because changes under the Trump administration are amending the taxable minimum to approximately 7.3%. Individuals employed by a company can expect to lose approximately $500 or more off their yearly salary or income because of the new law.
If you’re self-employed, expect even more money deducted because of laws dictating that you must pay both your share and the employer’s share of your Social Security contributions. That’s a robust 12.4% of your total income in self-employment with a ceiling limit of $118,500. Medicare taxes add on an additional 2.9%, for an overall tax of 15.3% – nearly $15,000 for every $100,000 you make each year. Once you reach the next bracket (approximately $200,000), you can expect your Medicare tax rate to increase by another 0.9%. That leaves you with a total contribution rate of 16.2%.
But, the news isn’t all bad; you can reclaim some of your contributions on your tax return. Simply use IRS Form 1040 to claim up to half of your contributions, and the amount will be factored into your refund at the end of the fiscal year.
Thinking that paying more will directly result in you being able to draw more from social security? Think again. The calculation used to determine the amount you are taxed is entirely separate from the calculation used to determine your eligible withdrawal amount. That’s because the taxable minimum isn’t based on inflation; rather, it’s based on the U.S. Index of Wages. Conversely, eligibility amounts are based on inflation and prices, and can fluctuate greatly year-to-year. At the end of the day, someone in retirement who is receiving $2,000 monthly can expect a benefit increase of approximately $8 or less.
Taxes – only those who file and receive a hefty refund really enjoy them, but they are a necessary part of everyday life. Keeping good records all throughout the year and watching IRS.gov for news on tax law changes is one of the best ways to ensure that you’re informed when tax time comes around.