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Your Money: Owe The IRS Money This Year? How Not To Next Year

 April 15, 2019 at 10:11 AM PDT

Speaker 1: 00:00 This is the day for last minute tax payers to scramble and many of them may be shocked to discover that that old reliable federal tax refund isn't that reliable this year. People used to getting back a nice chunk of money may not and may even owe the government. That's all because of the new tax reform laws. We can change much on this year's taxes. But what about next year's journey? Me Is Paul Lim financial planner with the wealth consulting group and advisor with San Diego Financial Literacy Center. Paul, welcome to the program. Hello Maureen. Why did the itemized deductions go away for so many people? Well, it's interesting where they put some caps on a lot of things that people use to deduct to an unlimited extent that now are quite a surprise for some people. I think the big ones are going to be what's called the salt deduction state and local tax limitation. So you use to be able to get a deduction for the state income taxes paid this year. Speaker 1: 00:56 That number is is taxed at 10,000 so whatever it is that you paid to them in excess of that dollar amount, you no longer receive that deduction as a result. That's one common example. Another big one is home mortgage interest. I think a big selling point for many realtors are loan officers would be, even though your house payment is very high, it's a great write off against your taxes. Those amounts were also capped at 10,000 so if you live in a very large house or you have a big mortgage payment, you no longer get to capture the entirety of that deductible interest going forward and just about for everyone, the personal exemption went up. What we have is called the standard deduction and this is basically a default number that the IRS gives you just in case you choose not to itemize, itemizing as the process of keeping track of every deduction that's allowable. Speaker 1: 01:45 Adding them all up and coming down to a bottom line number, but if you don't keep track of those figures, the IRS says, tell you what, I'll just give you a default number. It's 12,200 if you're a single person. And so even though you didn't keep receipts, I'll take your word for it and I'll simply allow you to have that deduction. So my point is you basically pick the higher of those two. You don't get both, you pick the higher of the two. And so because the government increased those standard deduction amounts so high, often people don't get the same impact that they would with their itemized list of deductions that they did in years previous. And how did that impact refunds for a lot of people who are used to getting large schedules of itemized deductions, some of them owed this year because of the fact that they didn't anticipate having that occur. Speaker 1: 02:35 And so their human resources department did not withhold as much taxes as they should have in the previous year. And this was really a surprise for everybody involved. As you can imagine, there are administrators at employer's tax advisors and a number of people who are all involved in the process and when a new law goes into effect, some of those can be disruptive. Now, I think that some of the changes can be short term pain for long term gain because I don't think that it's right for states to feel empowered to increase their tax burden just so that the person can get a ride off. And so the same thing applies to home mortgages to, I think you saw a lot of home prices increasing fairly rapidly because people felt as though the high price wasn't an issue because they get an associated right off. So we're feeling some of that short term pain. Speaker 1: 03:21 As of right now, if you owed the government money on your taxes this year, you go into your human resources department and you ask them to do what, you'll basically have a worksheet filled out where the, you request that they withhold a little bit more of taxes from each paycheck so that you won't be responsible for coming up with that amount this time next year. And do you claim a certain number to allow them to do that? Yes. There's actually a worksheet that you'll go through on a what's called form d for as well as form w four which will adjust your state, California and federal withholdings respectively. There's actually a a checklist that you walk through that tells you what number you should put based on answers to certain questions. So on those forms is exactly the information you need to walk through in order to determine that number. Speaker 1: 04:13 Very precisely. Okay, so let's talk about some of the changes listers can make to decrease the amount of taxes that they owe. One is to Max out retirement plans. Talk to us about that. Yeah, I've mentioned to you before that the retirement savings deduction is my favorite tax deduction that exists because you don't have to waste the money in order to realize the deduction. If I pay interest to a bank, for example, for my home loan, I never get to see that money again, but if I'm saving money into an account for my future self, I'm essentially putting that money in a time machine for me when I'm no longer working and I'm going to be able to spend that someday. If you invest it wisely, you'll have even more at the end to spend. And so if you're not going to spend the entirety of what you earn in a year, why would you want to make your taxable number any bigger than it has to be one of the best places to put excess savings dollars would be in an employer sponsored plans such as four o one k four or three B or or perhaps a thrift savings plan if you work for the government for example. Speaker 1: 05:13 How that a health savings plan, is that the same thing? We've actually looked at the health savings account as a great way to be able to utilize what are called pre tax dollars to pay for some medical expenses. So I'll give you some background. You know, in the last 10 years or so we've seen medical insurance premiums rise by double digit percentages. And so what individuals and employers have started to do is they have started to utilize higher deductible health plans and a deductible just to review is the amount for which you're 100% responsible for the costs before the health insurance starts sharing. In any of those costs. So the higher your deductible, the more you have to pay before you'll get any insurance company money given to you. But what's associated with those types of plans is what's called a health savings account. You can make a contribution to a health savings account, get a deduction in the process, and if you use it to pay for medical expenses, it's totally tax free. Speaker 1: 06:09 So I'll give you an example. Let's pretend you go to a chiropractor or an acupuncturist or some natural pathic doctor. Those are often covered on medical insurance plans as an out of network benefit. So you'll usually have two different schedules of benefits. One that's in network when that's out of network, and if the amount of expense that you incur on the out of network side doesn't even count towards your other deductible, well it's like you don't even have health insurance to begin with. One way to take the edge off of that though, is to pay for those services with pretax dollars. So let's pretend I have a bill for $1,000. If I had to pay for that with after tax money, I probably have to earn $1,400 to pay that much in tax 400 so I have a thousand in my pocket with which to cover that expense. If I'm using pre tax money though, I only have to earn a thousand to pay a thousand in other words, I get to spend the money before the IRS taxes it. So thinking about some of those things in your life that can be covered with pretax dollars is a great way to recapture some of the deductions that went away as a result of this law. I've, in speaking with Paul Lim, financial planner, with the wealth consulting group and advisor with San Diego Financial Literacy Center. Paul, thank you so much. Thank you, Laurie.

Many taxpayers may be shocked to discover that their reliable federal tax refund isn’t that reliable this year. It's too late to change much on this year’s taxes, but what about next years?