Well, it is that time of year again. The time of year we have to figure out our taxes. I’m sure this finds everyone excited and happy to be engaging once again in this annual ritual. Hopefully, this little message can make it a little better.
Many of us get anxious to hurry up and file our taxes. But, we must await all the forms we need. Many tax forms are due to be sent no later than January 31st. Some tax statements, like those from brokerage companies, are due to be sent by February 15th. This year, the 15th of February is a Saturday and Monday the 17th is a Federal holiday (Presidents’ Day). So, the 18th is the official deadline to have brokerage statements mailed. For those with online access, you do not have to wait for the postman, but may see them online as soon as they are ready.
Our tax system is notoriously complex. This leads to many companies not being able to accurately figure out the tax status of their dividends, among other things. Due to this, many brokerage companies will issue a preliminary tax statement by mid-February. However, those numbers may still be subject to change. Most brokerage companies wait until mid-March to issue a final tax document. Therefore, it may be wise to wait to file until after mid-March.
Some tax forms, like K-1’s, are due to be issued by March 15th. However, extensions may be given to as late as Sept 15th. K-1’s are issued by partnerships and small businesses. Most of our clients are not affected by these. If you do think you are owed a K-1, you may be able to find it here as soon as it is ready: https://www.taxpackagesupport.com/ . (Note: This site is in no way affiliated with TWPM.)
One of the reasons many people are in a hurry to file their taxes is because they expect to get a refund. For many, this feels like a good thing. It is not. It means that the taxpayer has given the IRS an interest free loan and paid too much during the year. Some feel they lack the discipline to save any other way and plan to use the funds for vacations, property taxes, or other needs. This can be solved by setting up an automatic savings account at the bank, where money moves from your checking to your savings account at the same time your paycheck is deposited.
Even worse in today’s environment of “Government shutdowns” it is possible that refunds could be delayed due to our elected officials wrangling and using refund money as leverage. Some States with income taxes have even been known to issue IOU’s instead of issuing refunds because they do not have the money; they have already spent the money the taxpayers overpaid. If the money is in your bank account, you will not have to worry if the Government is going to pay you back on time. If you owe a little extra, you should have it available in your savings account and you can make the Government wait on you instead of the other way.
I have seen people asked on the street by a reporter, “How much did you pay in taxes last year?” The answer from some is, “I don’t pay any, I get money back.” Actually, except for certain credits, “Money back,” does not mean you did not pay, it just means you paid more than you needed to pay.
This year, it is being reported that refunds are running about 8% less than the previous year. Some people are upset to learn this and think they are being cheated. With the passing of the new tax law, the withholdings rates by employers were also adjusted to attempt to get the withholdings more in line with what taxpayers may really owe. This means people, generally, had more “take home” money throughout last year because they overpaid less than they used to overpay.
Tax rates under the new tax law were generally lowered. The 15% bracket was lowered to 12%; the 25% to 22%; the 28% to 24%; the 33% to 32%; the 35% remained the same and the 39.6% was lowered to 37%. The dollar amounts for some of the brackets were also adjusted. There were many other changes. The end result, especially for those in lower brackets, will likely be lower total taxes paid or owed.
The top bracket rate a tax payer pays is just that, the top. The other, lower brackets still applied, too. It is the blending of all those rates, after deductions and adjustments, that results in the total tax owed in dollars. Dividing those total taxes owed into the total income results in the effective tax rate. For very many, the effective rate is likely to be lower under the new tax law. Still, everyone’s tax situation is unique.
We often ask that clients provide us with their tax returns. It helps us with planning and understanding our clients’ overall financial situation. Because of all the changes to the tax code, we would like to request that all our clients this year provide us with a copy their tax returns after they have filed them. Please, do not email these to us. For security, please, fax or upload them to the Raymond James Vault online (for those with a Raymond James account).
We wish you all the best this tax season!
Richard Tomes, CFP®