President Trump And The New Tax Code


Whatever your stance on our new president, he’s certainly promised to shake things up. One of his major points on the campaign trail was an overhaul of the tax code. What will this look like for individual taxpayers? 

1.) Nothing this year 

If you’re hoping to see changes to your tax burden this year, don’t hold your breath. The taxes you’re required to file before April are for 2016. That means the rules and regulations that govern them are already established. It’s possible there may be some clarifications and minor modifications at the periphery of the tax code issued this year, but the bulk of the tax law for your upcoming return is pretty well set.

This includes the individual mandate of the Affordable Care Act (ACA). You will need to provide documentation of your health insurance for all 12 months of 2016, unless you’re otherwise exempt from the mandate. Regardless of what the future holds for the ACA, it’s the law of the land for 2016.

One of the issues to keep an eye on is the extension of tax deductions for mortgage insurance premiums. They were tax deductible for 2015, but Congress has not yet renewed the break for 2016. If you pay mortgage insurance, it’s worth keeping an eye on what could be a significant change to your taxes. 

2.) Simplified brackets for 2017 

The tax code works by establishing a percentage of each threshold of money to be taxed. So, if you make $20,000 a year as a single person, under the current tax plan the first $9,750 is taxed at 10%, then the remaining $10,250 is taxed at 15%. Of course, thanks to deductions, it’s slightly more complicated than that, but this is how the system works at its core. Trump plans to keep the basis of this system in place, but make significant revisions to it.

One of the pillars of the Trump tax plan is a reduction in the number of tax brackets. Under the current tax code, there are seven different tax rates for different income levels. Under the proposed Trump policy, there will be only three. For both couples and individuals with incomes over $415,000, this will reflect a significant reduction in their tax burden.

To make up for this loss of revenue, two brackets will see an increase. The first $9,750 ($18,550 for married couples) will be taxed at 12% instead of 10%, and amounts between $112,500 and $190,150 ($225,000 and $231,450 for married couples) will be taxed at 33% instead of 28%. This may result in a higher tax liability for middle-income Americans. 

3.) Deduction changes 

To make up for this greater tax liability, the Trump plan makes significant changes to the way deductions work. For starters, the standard deduction, the one most people take, will increase to $15,000 for individuals and $30,000 for couples filing jointly. That means that, for most people, the first $15,000 you earn will be tax-free.

For those who itemize their deductions, life gets a little more complicated. First, deductions are capped at $100,000, which may be a blow to small business owners with lots of deductible business expenses. Second, deductions will phase out for high income earners. If your income is over $261,000 as an individual ($313,800 for couples), you’ll only be allowed to deduct a percentage of your itemized deductions from your income.

There’s also no more “head of household” filing status, so individuals with more than two dependents will need to reconsider their filing status. Couples with more than two children will no longer be able to claim exemptions for them, but will be able to deduct a greater portion of their child care expenses from their income.

There are other parts of the Trump plan, including a repeal of the estate tax and an end to the so-called marriage penalty that affects high-income married couples. Of course, all of these changes will have to pass Congress before they take effect, and Speaker of the House Paul Ryan has other ideas about how to reform the tax code. It’s likely that some, but not all, of these changes will be made for 2017, as the democratic process forces leaders to compromise for the greater good. Keep an eye on the goings-on in Washington as you file your taxes this year! 

Your Turn: Be king for a day. What changes do you want to see happen in the tax code? Let us know how to fix the system in the comments, and check out what other people are saying!


Tax Form Secrets Revealed


Tax forms have started rolling in and your mailbox looks like a can of alphabet soup exploded in it! What do you need and where do you start?

This is a tough time of year for people who don’t like paper. Starting at the end of January and continuing through March, taxpayers start drowning in paper. Sorting out what’s important and finding a place to store it is a big challenge, and it becomes harder if you don’t know what’s what. 

Fortunately, it’s easier to tell these forms apart than you might think. There are only a few types of forms you’ll need to deal with, and most of them don’t even need paper. Here are the four most common tax forms you’ll see and what to do with them! 

1.) W-2 
This is the most common informational form you’ll receive. It’s a statement from your employer that contains your yearly wages, how much tax you’ve had withheld and how much you’ve paid (pre-tax) for things like health care premiums. If you have one job, this may be the only major tax form you get. 

It’s also one of the most important forms. You’ll want to keep it with other tax documents until it’s time to file your taxes. This information – your yearly earnings and the amount of tax you’ve had withheld – are the most important factors for determining what your tax bill will be (or how big a refund you’ll get). 

2.) 1099 
This is a series of forms identifying income from sources other than a contract job. Most common is the 1099-INT, which lists interest income. You may get one of these from any financial institution where you have an account.
If you freelance or work as a contractor, you’ll probably receive a 1099-MISC. If you received unemployment or another source of government income, you’ll get a 1099-G. If you had debt canceled this year, you’ll get a 1099-C. There are a few other kinds of 1099 forms, but they all do basically the same thing.
You’ll need to hold on to these forms, too. They document income that you haven’t yet paid any taxes on. You’ll need the amounts on these forms when you get ready to file.
3.) 1095 
These are relatively new forms that deal with health insurance. Form 1095-A is a statement about insurance purchased through a marketplace exchange. 1095-B is for private health insurance. 1095-C is for employer-sponsored health care coverage.
These forms are important if you get a health insurance subsidy through the Affordable Care Act. If not, you can go ahead and put this form into long-term storage. You’ll be asked when you file if you had health insurance all 12 months of the year. The IRS receives a copy of this form to check your work, so you’ll only need it if issues come up regarding your coverage.
4.) 1098
Two forms, the 1098 and the 1098-T, report tax deductible expenses. The 1098 form lists mortgage interest and points on your primary residence, while the 1098-T itemizes tuition and other expenses paid to an institution of higher learning. The 1098-T is used in a variety of places, including claiming the Lifetime Learning Credit and the Hope Credit.
Unfortunately, in order to take advantage of deductions relating to mortgage expenses, you’ll need to itemize your deductions. Claiming the deductions listed on the 1098 requires you to forgo the standard deduction, which for most people turns out to be a bad idea. Unless you have a host of other deductions, or you bought or refinanced your home this year, claiming the standard deduction and filing the 1098 away for later will serve you best.
The bad news is you can’t file your taxes and be rid of the whole mess until you get all of your forms together. You’ll need to keep any W-2 forms, 1099 forms and your 1098-T form together until all of them arrive. Get a manila folder or a document envelope to keep them all in the same place. Keep that folder somewhere safe, and as soon as possible, file your taxes so you can put it into storage. Keep your returns for at least 3 years after you file. A paper copy of last year’s tax return in your filing cabinet can make a world of difference!
If you do your taxes yourself, you may want to look at an online resource like TurboTaxDestinations Credit Union members can get a discount of filing this way.
Your Turn: How do you keep up with the paperwork requirements of your tax return? Have a magical filing system? Share your best organizational strategies with us in the comments!


Your Tax Refund – Why Is It So Small?


This time of year, W-2 forms are coming in, shoe-boxes are coming out and kitchen tables are disappearing under a pile of documents.  It’s tax time, and the most common set of questions we hear revolve around the same issue: Why is my refund so small? How can I make it bigger? While we are not tax professionals, here are some observations we’ve had while serving our members over the years. You may want to discuss them in further detail with your tax advisor. 

Question:  Why is my refund so small?

Answer: There’s no secret to withholding. You tell the IRS factors about your life, your employer holds money back to “guess” at how much you’ll pay in income taxes, and then whatever has been withheld is paid to the IRS for covering your annual income tax burden. If, in fact, you’ve withheld more during the year than you need to pay, the IRS will pay you back any extra income you’ve withheld.

If your tax refund is smaller than you expect, then you didn’t withhold enough money to cover your tax bill. If the amount is surprising because it doesn’t look like last year’s refund, then you probably had something different happen this year. Did you pick up extra income? Did a child move out? Did you stop paying the interest on your mortgage or student loans? Knowing this, if you’re looking for a reason why your refund was smaller, start with the changes in your life.

If you still can’t figure it out, look at how much you made this year as well as your total withholding.  If you made significantly more than last year while withholding the same amount, that could be the reason.  If you want better, more specific answers, take your information to a tax preparation professional. 

Question:  So, should I withhold more?

Answer:  We hear this one a lot. Many of our members were raised on “the IRS savings plan,” particularly if they came from poorer or lower middle-class backgrounds. Families that had trouble getting ahead would plan on tax refunds for a once-a-year spending spree. Now, as the children of those families have grown up, they want to have that type of spree as well.

It’s not a good idea to withhold more money so you can have a bigger refund. In fact, it’s about the worst investment you can make, because you get paid no interest on it. Your money will even lose value due to inflation while the government holds it, so it’s like you paid someone for the privilege of not accessing your money while it earned zero interest. Imagine a free checking and savings account, except the exact opposite in every way: It’s not free, you can’t access it like a checking account, and you don’t earn interest on it like a savings account. It’s a free checking and savings account you set up for someone else. 

Question:  How can I get more money back?

Answer:  The obvious way to get more money back is to find more deductions or withhold more during the year. However, there are other ways to make tax time more profitable. 

Imagine that, instead of withholding an extra $100 every month, you invested it in a savings certificate, money market, or Christmas club account.  Over the course of the year, you’d accumulate $1,200 in principle, just like you’d have an extra $1,200 coming from the IRS. In other words, this method is just as good as the IRS savings plan: If something crazy happens on your tax return or you have some money to avoid a big tax bill, you can have a big annual spending spree.

But it’s better than withholding for a variety of reasons. First, you can access it if you’re putting that money into a money market or other savings program. (Try the high yields on our Kasasa Cash Rewards Checking account with a Saver attached.)  Second, your money will be protected from inflation, and then it will grow. Earnings on different programs vary based upon what you choose to invest in, along with other factors. But even earning a couple of percentage points above inflation could lead to another $100 in your pocket on top of the principle, and save you $100 that you would have lost to inflation. $200 isn’t chump change, particularly on a modest investment, and it could even be more depending upon how much you invest and the program you choose.  Even if you don’t earn much, though, it’s still better than giving that money away.


Even better, you can use that money to double dip.  If you withhold that extra $100 every month, then deposit it into one of our tax-exempt college or retirement savings funds, you can have a big payday while building deductions for next year, so you’ll get even more back.  Obviously, your specific situation will vary and there are limits to how much you can put into each of your tax-exempt accounts, but if you’re interested in starting the snowball effect of compound interest, tax deductions and long-term savings, give Destinations Credit Union a call at 410-663-2500 and we’ll get you set up in no time.  

IRS Scams 2016


Every year, the Detroit Auto Show brings in visitors from around the world to see the newest models from major car manufacturers. The Consumer Electronics Expo gives us a chance to see all the new gadgets that will be on our wish lists come holiday time. Penny Arcade Expo unveils the year’s new video games that our teenagers will be using to ignore their homework. For those of us who spend our days protecting other people’s money, January is the time of year we get to see the newest makes and models of IRS scams. 

That’s right, they’re back. Scammers are using tax time to take advantage of the unwary, and much like the newest Ford at the auto show or yet another iteration of the Madden video game, all of the hype is kind of disappointing, because this year’s models look so much like last year’s. What happened to innovation? 

So let’s take a look at the “new and improved’ 2016 lineup of IRS scams. Of course, it’s important to remember that innovation can happen at any time, so just because something isn’t listed below, it does not mean it’s not a scam. If you have any suspicion you’re dealing with a scam, hang up, call the IRS or send an email to the Federal Trade Commission (FTC). Caution is your best approach. 

The telephone scams 

Up first is one of the oldest scams in the IRS scam lineup. You get a phone call from someone claiming to be from the IRS and claiming you owe money. They insist that if you don’t pay right now, you’ll go to jail. You might recognize this one as a variation on a grandparent scam or Nigerian Prince scam, but if not, the process is simple: You don’t owe the money and the scammers are trying to get you to give them money they don’t deserve. 

If someone calls you claiming to be from the IRS, even if your caller ID says “IRS” or the like, hang up and call the IRS. If it’s legitimate, then you will be able to find out from the IRS. If not, you’ll find out right away. Remember, you have a right to an attorney, you can have your accountant present if you’re being audited, and you have the right to due process no matter the charge. Don’t ever assume you have to pay anyone right away just because they called you and demanded payment. 

The email scam 

One newer variation of the telephone scam is an email version carrying the same threat, but asking for much less money. This is a traditional phishing scam in which scammers ask for a modest sum that’s payable online. Their hope is that you’ll see a small amount, compare it to the terrible consequences they’re threatening, and pay to make it go away. After all, who wouldn’t spend $50 or $100 to make the IRS go away? Unfortunately, though, you won’t be entering your financial info on a secure site that’s provided by the IRS. You’ll be entering your info on a dummy site that’s set up by scammers to grab your credit card or checking account information. They’ll in turn use that info to rack up all sorts of fraudulent charges. 

As a rule of thumb, never, ever, follow the link in an email to a site where you may be asked to enter financial information.  If you have an email from the IRS, see if you can find your account by going directly to the IRS website.  The same is true for eBay, Amazon, and other retailers that scammers love to impersonate. Yes, it’s easier to follow a link than it is to find the right page on your own, but scammers are counting on that.  A few clicks could save you thousands of dollars. 

The tax preparer scam 

The final variation of this scam is the tax preparer phishing email scam. In this one, the goal is the same as the variation described above. Instead of impersonating the IRS, they’re impersonating a tax preparer. They’ll likely have some authentic-looking credentials, which are fake, and assure you everything’s alright, but you need to update your info on the IRS’ e-file page. The problem is, the link in the email doesn’t take you to the IRS’ page. It takes you to … you guessed it! A dummy page that looks like an IRS page but actually captures the financial information you enter. 

Don’t be a victim. Always follow through with an extra phone call or email. Don’t follow links that are provided in emails and don’t assume that a webpage that looks OK must be OK. It’s tax time, the time of year where we get a national math test, and math tests are stressful for everyone. Scammers know that and they prey on it. 

If you suspect you’ve been the victim of identity theft, let us know. The sooner we know, the more protection we can offer. Also, file a complaint with the FTC and alert one of the major credit bureaus.

Sources:

https://www.irs.gov/uac/Tax-Scams-Consumer-Alerts