It’s 2019 and tax season is officially underway. As Americans rush to file their taxes this year, some are discovering an unfortunate reality.
Roughly 30 million Americans are expected to write a check to Uncle Sam. That accounts for 21 percent of United States tax filers.
This is catching many people by surprise due to the recently passed Tax Cuts and Jobs Act (TCJA). Americans were under the impression that they would be seeing a larger tax refund than normal this year.
With this negative news in mind, many tax filers are asking, “How do I find out how much I owe the IRS?” Read on to learn how to calculate and submit your taxes before the April deadline.
What Is the Tax Cuts and Jobs Act?
Before starting your taxes, it is important to understand the newly passed tax reform package. Last year, the United States Congress passed a substantial overhaul of the tax collection process.
This tax reform is commonly referred to as the TCJA. This new law changed everything including deductions, tax rates, and exemptions.
Continue reading for a brief synopsis of the major changes to the tax law. These changes will help you answer the question, “how do I find out how much I owe the IRS.”
One of the most impactful changes of the TCJA is to the standard deduction. It is estimated that 90 percent of taxpayers will use the standard deduction in 2018.
The standard deduction is a fixed amount that reduces your annual income. Using the standard deduction is advantageous because it is much simpler than itemizing.
For single filers, the standard deduction increased from $6,500 to $12,000. Married couples, on the other hand, will see it increase from $13,000 to $24,000. This amount is so generous that the vast majority of filers will use standard deduction instead of itemized now.
Personal exemptions were a major part of the prior tax structure. In addition to deductions, personal exemptions were another tool to lower taxable income.
The way that they worked was that you reduced income by $4,050 for each person in the household. This included yourself, as well as your spouse and any dependents.
Under the TCJA, tax filers no longer need to worry about personal exemptions. The law eliminated their usage until 2025.
Tax filers can still itemize their taxes if they have sufficient deductions. The only way this is an effective strategy is if your itemized deductions exceed the standard threshold.
There are far too many deductions to cover in one article. Instead, we will cover the most significant deduction reforms due to the TCJA.
Perhaps the most impactful change is a cap to the state and local tax (SALT) deduction. In the past, there was no limit on the amount you could deduct. The TCJA, on the other hand, caps this deduction at $10,000. This is not a sufficient amount for many people living in high-tax states like California or New Jersey.
Another change in the positive direction is the Qualified Business Income Deduction. This allows business owners to deduct 20 percent of their income.
One of the best changes for tax filers is the child tax credit. Previously, tax filers received a $1000 tax credit for each dependent child that they claimed.
Tax credits are more impactful than deductions because they are a dollar for dollar reduction in the amount that you owe. The TCJA doubled the child tax credit to $2,000. This means you get an extra $1,000 credit for each claimed child.
How Do I Prepare for Tax Season?
Tax preparation is the first step to answering the question, “How do I find out how much I owe the IRS?” Near the end of January, you will start receiving important tax documents in the mail. Some companies make tax documents available to download on their secure website.
For most people, the most important document for tax purposes is the W-2. This is your wages and income statement provided by your employer.
It shows how much money you earned during the prior calendar year. In addition, it also states how much in federal and state income taxes were paid.
Some workers are considered independent contractors and do not get a W-2 form. Instead, the company that contracts out for their services sends a 1099-MISC form. The information on this form is very similar to the W-2.
Banks and lenders are institutions that also send out important tax documentation. Your mortgage lender sends out a 1098 form that states how much mortgage interest and property taxes were paid. Both of these items are common deductions for those that itemize.
Other common examples are the 1098-E or 1098-T form. These forms cover student loan interest or tuition, which are both adjustments to income.
How Do I Find Out How Much I Owe the IRS?
There are two primary ways to answer the question, “How do I find out much I owe the IRS?” The easiest way is to take all of your tax preparation documents to a certified accountant.
For a service fee, an accountant will submit your taxes for you. In addition, tax professionals provide legal support in the event of an IRS audit.
The other way is to download tax preparation software. There are many well-known, reputable software programs available for purchase.
These software programs ask you to manually insert data from tax documents. The programs generate IRS documents for submission and transmit them for you.
There is a downside to choosing tax preparation software over a professional accountant. An accountant is the only one truly capable of guaranteeing a maximum tax refund. If you are unaware of a deduction or credit, the software is going to skip right over it.
Wrapping It Up
Tax season is an important time of year for personal finance. Many people use their tax return as forced savings and get a large return. Others are desperately trying to minimize the amount that they owe to Uncle Sam.
If you need professional help answering any of your tax questions, please contact us for assistance.