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This time of year, most families’ biggest financial concern is filing income taxes. In 2018, a brand new tax bill took effect and brought in sweeping changes to many family’s personal income taxes and lots of questions with it. A year later, I’m still getting lots of inquiries about it, so this week, I’ve put together your most common income tax questions and answers

Disclaimer: My degree and career experience is in Finance and Business Economics. I am not a CPA or tax accountant. Every personal financial and tax situation is different, and only a CPA with your full financial information can properly advise you. You should always consult with a CPA, specializing in personal income tax, regarding your personal taxes.


Family Finance Moms Most Asked Income Tax Questions

Every year come February, I see it all over social media. People get their W2s in the mail, and start filing their income taxes, celebrating big tax returns and how they plan to spend their big check. And every year, a part of me cringes inside.

Sure, we would all like to get a tax refund instead of being surprised by owing a large amount to the IRS… but here’s what you have to recognize. A tax refund just means you overpaid all year long: you are jut getting your own, hard-earned money back, after letting the government hold onto it for you.

You could have been bringing home more money in your paycheck all year, saving it or investing it and earning a return – and instead, you gave the government an interest-free loan.

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Lots of people are already celebrating receiving a healthy tax refund this year, and making plans for how they’ll spend it…⁣ *⁣ And yes, we all would rather get a check back than discover we owe some huge amount when we file our taxes, but…⁣ *⁣ Here’s the thing – if you get a big check back from Uncle Sam, it just means you overpaid all year long. You basically gave the government an interest free loan for the year.⁣ *⁣ So, if you got a big fat refund (or were unpleasantly surprised by owing money), consider going to your HR department and reevaluating your W4 form. You no longer claim allowances anymore, so by following the explicit directions, it should closely match your tax liability. Be sure only you or your spouse claim your children, preferably at the highest earning job.⁣ *⁣ Then, if you see more in your paycheck every month, put it in a sinking fund to all those things your putting this year’s refund towards, and earn yourself some interest while you’re at it. ⁣ ⁣ *⁣ *⁣ *⁣ *⁣ *⁣ #taxes #taxseason #taxrefund #taxtime #taxreturn #familybudget #familyfinance #familyfinances #personalfinance #financialliteracy #financialeducation #financialfreedom #timefreedom #hardworker #debtfree #dfc #debtfreecommunity #debtfreeliving #savemore #spendless #sinkingfunds #personalfinanceblog #financeblogger #womenandmoney #womenhelpibgwomen #womeninfinance #ffmquotes #familyfinancemom

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So, how do you make sure that doesn’t happen next year? Let’s walk through your most common income tax questions and answers, to help you take action now and plan ahead for next tax season.

What is the new W4 form?

The W4 has been redesigned for 2020 for the first time really since the late 1980s. You may recall it used to ask you to claim a number of allowances, based on things like whether or not you were the head of household, had dependents or owned a home.

Now, the W4 removes much of the ambiguity that came with trying to pick just one number. There is no claiming of allowances. Instead, it looks a lot more like your income tax calculation. Click on the image above to download the entirety of the form directly from the IRS website, including detailed instructions on how to complete it.

Given the total revamp of the form this year, I highly recommend completing a new form with your HR or payroll department this year.

How do I figure out what I should withhold?

You can complete the new W4 form, or if you find your situation to be more complex, you can use the IRS’s brand new Tax Estimator.

Just like many tax prep programs, it walks you through a series of questions. You will definitely need your W2 statements and most recent pay stub to accurately complete the Tax Estimator questionnaire.

We always end up owing. WHY??? What should we claim if we both work?

When you are married, taxes get a little more complicated. Your job withholds taxes from your paycheck based on YOUR income. Unless you tell them otherwise and properly complete the W4 form, they have no way of knowing what your spouse makes.

Your taxes are now based on your combined, household income. Combined, you could be in an entirely new tax bracket, meaning your income marginal tax rate could be a full 10% points higher than what your payroll department is withholding.

Let’s say your spouse makes $105,050 annually, and you make $50,000. Every dollar of income you make would fall into the 22% tax bracket. But your employer is likely withholding for you at 12% rate. This would leave you owing, absent other deductions, about $5,000 at the end of the year.

Complete the new W4 form, using their instructions for married couples who both work, or the Tax Estimator to make sure you complete the W4 appropriately and withhold enough during the year.

How do I know if I need to pay taxes during the year to avoid penalties?

By law, US taxpayers are required to pay most of their tax obligation during the year, rather than just when they file at the end of the year. This is typically done by having tax withheld from paychecks, or by making estimated tax payments quarterly.

You end up owing a penalty when you file, if you did not pay at least 90% of the taxes owed during the year. If you are self-employed, an independent contractor, sole proprietor, or partner receiving distributions that don’t have tax withholdings, you likely need to file tax estimates during the year to avoid a penalty.

You can learn more about tax estimates and how to file them here.

Last year I got a big bonus/severance. It was highly taxed. Can I expect a refund?

Not necessarily. Every pay period, your taxes are likely withheld at your estimated effective tax rate. This is the blended rate you end up paying, or your total taxes paid divided by your total income. In 2017, for the bottom 99% of taxpayers, the average effective rate was 11.4%.

Your bonus or severance will be taxed at your marginal tax rate. And particularly if it is a large lump sum, significantly greater than your salary, the rate will be higher than your effective rate.

What deductions are actually worth writing off?

In December 2017, Congress passed a new tax bill. Its general intent was to simplify the tax code by significantly increasing the standard deduction for everyone so fewer people would have to itemize deductions. Before these changes, it is estimated about 70% of households used the standard deduction, but now, it is expected that 95% of households will.

If you choose to itemize, your deductions would have to be greater than the new, higher standard deduction (for 2020, $24,800 for married couples filing jointly). These are the deductions eligible for itemization:

  • Mortgage interest on up to $750,000 of mortgage debt
  • Charitable contributions (but don’t count those college donations you make to be eligible to buy athletic tickets like we have to make as Notre Dame alumni!)
  • Medical expenses, but only if they exceed 7.5% of your adjusted gross income
  • State income, sales and property taxes: you can deduct state income or state sales tax (not both) and property taxes, with one big caveat. The new tax bill caps this deduction at $10,000 per year, so if you live in a high-tax state, like mine, you don’t get to deduct it all anymore

If we bought a home, do we need to itemize now?

Before 2018, the answer to this was likely yes – and in fact, motivated many to be homeowners. But, with the higher standard deductions ($24,800 in 2020 for married joint filers), most married couples filing jointly no longer pay enough in mortgage interest and property taxes to exceed the standard deduction.

If your mortgage interest plus property taxes (not exceeding $10,000 in both state income and property tax), along with other itemized deductions exceed $24,800 in 2020, then you should itemize. Otherwise, you are better off with the standard deduction.

When should you hire someone to do your taxes for you?

When your taxes get more complicated than you are capable of or comfortable with handling on your own.

When it’s just you, with a single W2, taxes are pretty straight forward, and easily handled on your own with pencil and a calculator, or tax prep software. When you get married and combine your incomes, it can get a little more complex. If you are self-employed or have complex investment income, need to file in multiple states, it can be well worth paying for some help.

We started using a tax accountant the year after we got married. I had always done my own. Then, the first year we got married, which was also the first year I had an investment in my firm’s hedge fund and the year we bought a house, we decided to go to a big name tax firm for some help. One second, he said we owed $10,000 (what?!?!?), and the next, we were getting a refund. We paid for the audit protection coverage that year since, big shock, we didn’t feel super confident after all of that. We then asked our neighbors, long-time small business owners, for a referral to their tax accountant, who we have used ever since.

What to ask a tax accountant before you hire one?

This is a great question. Just like you’ll want to ask questions before hiring a financial advisor, you should also interview and question a tax accountant before hiring one.

  • Do they have a PTIN? Any accountant who is paid to prepare taxes for others must have a Preparer Tax ID number. This can easily be obtained through an online registration process. It is not an endorsement but is required to be paid for work on someone else’s tax return.
  • Are they a CPA? The Certified Public Accountant is the oldest, most well-known and regarded accounting designation. They can sign tax returns as a paid preparer and represent clients in front of the IRS. There is also the EA, enrolled agent, a certification given by the federal government specifically to handle taxes.
  • What types of clients do you service? You want to make sure your CPA is well-versed in handling other clients like you, so they are up to speed on tax code changes and deductions available to you.
  • Are they more aggressive or conservative? As with all laws, there are black, white and shades of gray. Some accountants will look to exhaust every deduction possible to get you the lowest tax bill possible, while others will follow the letter of the law with no margin for error. Find a tax preparer you share the same philosophy with to make sure you are happy with their work and comfortable with their choices.
  • What and how do they charge for their services? Make sure you know how you will be charged and what you will be charged for. Is it a lump sum fee? Are there different fees for local, state and federal returns? Do they charge hourly?
  • Who will do the work? Are you meeting with a CPA at an accounting firm who will farm your work out to junior team members? Or are you meeting and talking with the person who will be completing your return?
  • What is the process to complete the work? Make sure you understand exactly what information you need to provide, when your return will be completed, and what you need to do, if anything, to submit it. We meet with our accountant with all our documentation, send him any necessary follow-up items, he mails and emails us copies of our return, and we sign and submit them with payment, if necessary.

Are 1099s treated the same as W2s?

The short answer? No. While 1099s and W2s are both forms used to report your income for your tax return, they are pretty different. A W2 is what most employees are familiar with – your company reports your wages, benefits, and tax withholdings for the year on one tidy little form.

A 1099 is issued to independent contractors, who are not considered employees. These independent contractors are responsible for withholding their own taxes, and do not receive other employee benefits.

So while both forms are used for reporting income, they represent different employment status.


Get More Insights on Income Taxes

Tax season can be stressful - but having a better understanding for how our tax laws work and planning ahead of time - can make it a lot easier.


Federal income taxes and tax time can be overwhelming. I am far from an expert, but hopefully these income tax questions and answers will help you feel a little more confident as you tackle your tax returns this year. Please be sure to confirm with a professional tax accountant any questions about your specific tax situation before filing your return this year!

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About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

2 Comments

  1. Richard Buckley on February 27, 2020 at 9:46 am

    Meghan,
    The new tax law that doubled the standard deduction and eliminated some itemized deductions passed in December 2017, not 2018. It took effect starting in the 2018 tax year.

    • Meghan on February 28, 2020 at 8:01 am

      You are totally right! Time flies… will fix that.

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