Top Tax Mistakes to Avoid in 2020
Even though the Tax Cuts and Jobs Act was rolled out more than a year ago, several of the revisions went into effect in 2019 and will affect many taxpayers 2020 returns.
As we near the 2020 tax filing season, we thought we’d outline some of the top problems accountants may encounter when helping their clients file, and also provide a little background for the small business owners handling tax season solo.
The Individual Mandate Penalty
Introduced under the Affordable Care Act, the shared responsibility payment, otherwise known as the individual mandate penalty, required individuals to have some form of health insurance, whether private, employer, or through the ‘Obamacare’s marketplace’. If they did not show proof of that insurance, they were required by the federal government to pay a penalty fine. Starting in the 2020 tax season that penalty no longer exists at the federal level; however, there are still some state-based penalties to be aware of in states like New Jersey, Massachusetts, and D.C. Other states are in the process of implementing similar mandates, though some don’t have monetary penalties. Prior to filing tax returns, it’s important to check your client’s state requirements.
Medical Expense Deductions
When the Affordable Care Act rolled out in 2010, it raised the threshold for deductible medical and dental expenses from 7.5% to 10% of one’s adjusted gross income. Then came the Tax Cuts and Jobs Act, which lowered the threshold back down to 7.5% from 2017 to 2018. However, this year, it’s raising back up to 10%. If all this back and forth is giving you a headache worthy of a medical bill, don’t worry - just keep in mind that any unreimbursed medical and dental expenses need to exceed 10% of your client’s adjusted gross income for it to qualify as deductible.
Income Reporting Errors
For many, reporting their income on their tax filings is easy – they were either a W-2 employee or a 1099 contractor. However, considering the increasing gig economy with jobs like Uber and TaskRabbit on the rise, it’s becoming more common for taxpayers to have multiple forms of income they need to report on their tax filings. It’s important to make sure you and your clients are accounting for all of their income from the last year, not just their main source. Failing to do so is a sure-fire way to get slapped with a fine.
Self-Employed Quarterly Estimated Taxes and Underpayment
Freelancing is on the rise, but many freelancers are unaware that they may be required to pay quarterly estimated taxes for the 2019 tax year based on how much they earn. If they miss a payment or pay late, it can be disastrous, resulting in a massive tax bill come April and triggering late fees and interest charges. While these fees may seem minor in theory, they can add up quickly for high earners. Luckily, the IRS offers useful resources to self-employed workers that outline these tax payments and when they need to be paid, and by whom.
Additionally, it’s key that freelancers accurately estimate their tax burden, which requires keeping accurate records and running frequent calculations to make sure their estimate is within range. Overpaying is far better than underpaying, as they’ll get any extra back in their tax return, rather than owing more on their next tax return. It’s generally recommended that most taxpayers to reserve around 25% of their payments to pay these taxes, just to be on the safe side.
Did you know that a record 15 million people – one in ten filers – received a six-month filing extension for the 2018 returns? While it may seem like a no-brainer to make sure your clients have filed by the deadline, sometimes it comes up quicker than small business owners expect. All accountants and bookkeepers know the importance of starting one’s tax filing as early as possible to make sure they have their ducks in a row in time for tax season. It’s also important to remind your clients that you’re going to get slammed during tax season, so waiting to the last minute might mean losing out on scheduling a necessary appointment.
While 2018 was the year for major tax changes, 2019 is still feeling the effects. It’s critical to keep atop of local and federal tax regulations or risk penalties and fines. If you’re not sure whether you’re in compliance, it’s best to consult the IRS’s website as additional information may continue to roll out.