Itemizing might still be worthwhile for taxpayers
Nick Fields and Kristen Duncan, volunteers with the Cherokee Nation Business Technology program, on Feb. 6 man an information desk in Tahlequah to assist taxpayers using the tribe’s Volunteer Income Tax Services. D. SEAN ROWLEY/CHEROKEE PHOENIX
TAHLEQUAH – When taxpayers seek advice about filling out their forms, there are often two overriding reasons: minimizing a tax bill and avoiding an audit.
When the Trump administration and GOP-controlled Congress passed the Tax Cuts and Jobs Act in 2017, many of its provisions were supposed to sunset after a year or two, but instead were extended or were resurrected by the Taxpayer Certainty and Disaster Relief Act of 2019.
Taxpayers can consult with a tax preparer or accountant, or visit IRS.gov to find out what stuck and what has gone away, but there are options that could allow a taxpayer to reduce the amount owed. There are other deductions that have been long-standing.
“Of particular importance to low-to-moderate-income individuals, particularly those with children, is the Earned Income Tax Credit program that reduces the amount of taxes owed,” Cherokee Nation Commerce Services Executive Director Anna Knight said. “The EITC program applies to individuals working for themselves or an employer, who can then use their tax refunds to build financial assets and increase family self-sufficiency. The IRS estimates only an estimated 20 percent of eligible applicants do not apply for EITC.”
When the TCJA was passed, the standard deduction was increased with the intent of minimizing the number of taxpayers who itemize. It has succeeded reducing “itemizers” from about 30 percent of taxpayers to less than 14 percent. Whether it is better to itemize or take the deduction will require figuring taxes both ways.
• The 2017 TCJA put the threshold or itemized health care deductions at 7.5% of adjusted gross income through 2018, but the disaster act extended it through 2020, after which the threshold is supposed to rise to 10%.
• There is a small number of taxpayers who qualified in past years for the health insurance coverage tax credit, which equals 72.5 percent of charged premiums. The expiration has been delayed through 2020.
• It might be worthwhile to file an amended 2018 return due to a number of retroactive breaks put in place. Check with a tax preparer to see if any of them apply.
• The disaster act temporarily suspended the limits on charitable contribution deductions if those donations were made to disaster relief organizations covered by the act.
• Normally, a forgiven debt is deemed taxable as cancellation of debt, or COD income, but a temporary exception was allowed for COD income from cancelled mortgages on primary residences that were nixed between 2007-17. That exception has been extended through Dec. 31, 2020. The limit is $2 million in debt, or $1 million for married couples filing separately.
• The college tuition write-off is extended through 2020. It can be claimed with or without itemizing. The deduction of qualified expenses of up to $4,000 is allowed for those making up to $65,000 or $130,000 for married-filing jointly. Up to $2,000 can be deducted up to $80,000 and $160,000. Above those thresholds, the deduction is not allowed.
Taxpayers who are concerned about being audited are already ahead in the count if they make less that $1 million a year. The IRS is dealing with fewer staff and less funding, so the agency isn’t examining as many returns.
That doesn’t make cheating a good idea. Tripwires are still in place, and the best way to become another face in the crowd is to maximize accuracy when figuring the tax bill and completing the forms. An honest mistake is likely to be treated as such, but it results in a 20% penalty on any underpayment, plus interest.
Underreporting deemed fraud draws a 75 percent penalty on the underpayment.
One effective way to draw an audit is to misreport dividend income or IRA distributions. A taxpayer can still set off IRS alarms in numerous ways:
• Reporting charitable donations that seem overly generous compared to income.
• Nearly 8% percent of estate tax returns are audited.
• Claiming business deductions that seem out of line with reported income.
• Stashing a lot of money offshore. Accounts with more than $10,000 and assets exceeding $50,000 require the filing of specific forms.
• Claiming a home office isn’t the automatic audit trigger that some claim, but because the provisions are so easily abused, a taxpayer should make certain all requirements for reporting space and its exclusive use are followed.
Other issues that might result in a double-take by the IRS include currency transactions; running a cash dependent business like a taxi, salon, restaurant or tavern; alimony deductions; writing off losses on real estate, day trading or hobbies; claiming a vehicle is entirely for business use; and simple math errors.
While many taxpayers maximize withholding from their paychecks to avoid owing at the end of the year, and to get a refund with which to splurge, the IRS suggests getting the year-end tax bill near zero, whether by increasing or decreasing withholding. Reducing withholding and forgoing the big refund simply means more money in the taxpayer’s pocket for daily expenses throughout the year.