Tax preparation is rarely easy, but this filing season comes with a unique set of complications.
It's the first year people are filing under the massive overhaul to tax law put in place by Congress in late 2017. Tax season also kicked off days after a partial government shutdown. Still, some taxpayers are feeling a bit confused.
The Associated Press enlisted executives from some of the biggest tax preparers to answer questions about this tax season.
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Questions were answered by Kathy Pickering, executive director of The Tax Institute at H&R Block; Mark Steber, chief tax officer at Jackson Hewitt; and David Williams, chief tax officer at TurboTax maker Intuit.
Q. What is the biggest change Americans should expect this tax season?
A. The tax overhaul is the biggest change to the tax code in 30 years, but how it exactly impacts each person depends entirely on their specific circumstances, Pickering said.
Despite the changes, the tax filing experience will feel familiar, Pickering said. For example, taxpayers will still need to gather tax and financial documents, calculate whether to itemize or take the standard deduction, determine eligibility for deductions and credits and prepare their returns, he said.
Every taxpayer is impacted in some way, said Steber.
One of the biggest changes is that there are no more personal or dependent exemptions, Steber said. That means the exemption you could previously deduct for yourself and each of your dependents is gone, although dependents will still play a big role in other ways.
Another change is the increase in the standard deduction — it has roughly doubled. People who used to itemize may find it's now advantageous to take the standard deduction instead. TurboTax estimates nearly 90 percent of taxpayers will take the higher standard deduction, up from 70 percent last year.
Some taxpayers might notice an unexpected change if they didn't update their tax withholding status last year after the IRS released new withholding tables.
"It's important to look at the total tax picture," Williams said. "Five of seven tax rates have been lowered, and because the new law reduces tax rates, many people are expecting to see more money in their pockets. While it's true that many may see an increase, it's important to remember that it may have come in the form of bigger paychecks in 2018 instead of a larger tax refund in the spring. It may also come in the form of a lower balance due," Williams said.
Q. Are people prepared?
A. "People are no less prepared this year than in the past," Steber said.
Some taxpayers may be surprised if their refund shrinks or they owe money. But that means they likely got more in their paycheck all year long, he points out.
So while most people will come out ahead overall, it won't feel that way for the people who got a smaller refund or owe, Pickering said.
"It's important to remember that tax laws change every year," Williams said. "This is nothing new for us (as a company). Taxpayers don't need to know the tax laws — we have them covered."
Q. Who will see the most change in their tax filing experience?
A. Pickering said those most at risk of decreased refunds or owing for 2018 are consumers who itemize and have no dependents, homeowners in high-tax states, and employees with unreimbursed business expenses.
Taxpayers with dependents will see an increase in credits this year due to changes to the child tax credits, Steber points out. Those who qualify for the earned income tax credit will also see a slight increase in refunds.
The majority of taxpayers who usually take the standard deduction may see more money in their pocket, but again this does not necessarily mean it will show up in their refund, said Williams. It could have shown up in their paycheck last year or as a lower tax balance due.
Q. Is it ever worth it to itemize?
A. Yes. All the experts agree you should still run through the calculations to find out if it's better to itemize or take the standard deduction.
Although people are less likely to itemize, there are still plenty of deductions out there for those that do, Pickering said. You can deduct mortgage interest on up to two homes, charitable donations, medical expenses that exceed 7.5 percent of adjusted gross income and up to $10,000 in personal property tax, real estate tax, and state and local income or sales tax, among other things.
"Even if the individual expenses are small, adding them all up can make a difference to the taxpayer's bottom line and be well worthwhile," Pickering said.
Q. How will changes at the federal level impact state taxes?
A. "People don't see the ripple down or domino effects to the states," Pickering said. "Each state has to figure out what the impact of tax reform is on their filing process."
States with an income tax had to decide if they were going to follow the IRS or not. Many states follow federal returns and have tax laws that mimic the IRS. Either way, many states did a lot of work to prepare for this coming tax season, Steber said.
Taxpayers who use a tax professional or tax preparation software don't really have to worry as those state-level changes and calculations will be done for you.
Q. What question has come up most often so far this season?
People want to know how tax reform is impacting them, why their refunds changed, and whether to expect delays receiving their refunds, Pickering said.
The IRS has committed to timely returns. But it's required to hold refunds for returns claiming the earned income tax credit and additional child tax credit until mid-February. Approximately 30 million taxpayers claim the earned income tax credit or the additional child tax credit, with half filing early, which means as many as 15 million taxpayers could have their refunds delayed until then.
Williams said TurboTax is hearing questions about what popular deductions and credits have changed and what can still be claimed. He reiterated that although some tax deductions went away with the passage of the new tax law, there are still tax deductions and credits you can claim to maximize your tax refund.
Q. How has the shutdown impacted things?
A. The IRS has a large backlog of paper that it needs to process, so this is not the year to file on paper if you can possibly avoid it. The IRS' service level is lower this year, too, so contacting it for questions will require patience, Pickering said. If you have tax questions or need help filing your return, this would be a good year to get help.
The IRS encourages all taxpayers to file as soon as possible. Combined with e-filing, direct deposit is the fastest way to get your tax refund. The IRS anticipates issuing more than nine out of 10 federal tax refunds within 21 days from acceptance.
Q. Anything else people should know?
A. Don't wait to file. And if you don't like the outcome this year, make sure to avoid a repeat by updating your withholding with your employer.