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Significant changes to tax law took effect in 2018. I heard some interesting comments from clients. Some didn’t believe taxes went down because their refunds didn’t increase. To be fair, taxes did go down for most people, but so did tax withholding from paychecks, keeping many refunds level with prior years. I guess people didn’t notice the extra take home pay.
The other thing I sometimes heard was that they thought their tax return would fit on a single piece of paper. That one made me chuckle because all of the lines eliminated from Form 1040 found their way onto a handful of new schedules, making for more pages than ever.
What might preparers hear and see this year?
Of course there are the recurring questions we hear every year.
1. “I’m filing as head of household,” a client told me.
You can’t be head of household,” I explained. “You don’t have any dependents”.
“Yeah, but I’m still the head of my household.”
2. Why does my friend get a bigger refund than me? We have no idea why, and if we did, we are not allowed to tell you.
3. That income doesn’t have to be on my return, they already taxed me on that! We often hear this one when a worker takes an early withdrawal from a 401K and has tax withheld, or when a casino withholds taxes on a jackpot.
Feel free to add to the list.
Actual Scenario:
Taxpayer added second job, which led to higher AGI, which reduced its refund compared to prior year when it had only one job.
Taxpayer stood up in a huff and declared they were quitting their second job.
Taxpayers say the darnest things.
[Scenario happened during AARP Tax-Aide shift]
Yep.
Similar scenarios, HP.
The couple could have saved $500 dollars MFS. The wife had plenty withheld and would have received a refund. Husband was under withheld and had a small balance due, and insisted they file joint.
A wife had some unexpected contract work, which of course had no withholding. It resulted in a smaller refund than the couple usually received. Her husband threw a fit in the office.
Clients are so cute😂
“I guess people didn’t notice the extra take home pay.” I’m not surprised. With the higher cost of everything these days, the “extra” is gone before anyone can notice!
Apologies for going on a mild tangent.
We recently completed sale of our business, and made an appointment with our accountant to get advice on how & when to distribute the proceeds of the sale.
After a (modererate) windfall from the sale, I was expecting a significant tax bill. But the advice and guidance of an experience tax professional meant we will receive refunds for several years into the future. To my very simple understanding, this is due to previous tax paid by the business, which included franking dividends (for context, we are in Australia).
I have huge admiration for those that make all the effort to understand tax laws and then provide such high value advice to their clients.
Greg, thanks for your post. Also, thanks for the articles penned while selling your business.
Good tax preparers take their jobs seriously, keeping up with changing laws, and having a sense of pride in doing the job well. Unfortunately, like virtually every occupation, there are plenty who just go through the motions. I’m glad that you’ve found one of the good ones.
Thanks Dan.
“Selling our business – the aftermath” coming soon!
I’m an AARP tax preparer. I fully expect to spend a lot of time explaining why people are paying tax on Social Security. This was a promise made by Trump that was not delivered. There was a fair amount of discussion during the 2024 return season and I advised my clients to not count their chickens.
Is paying tax on a portion of SS widely misunderstood or simply disliked because it is a tax?
The logic behind the tax is simple and similar to taxing a pension plan, even a contributory one.
But I get it, many people think they paid for their SS benefit via FICA.
When I get in that discussion I ask the person if that is true, why don’t your SS benefits stop at the point you have collected an amount equal to the taxes you paid.
I hit that point eight years ago.
Tax on SS is WIDELY misunderstood. To begin, people don’t understand the Retirement Earnings Test (RET) that causes some benefits of early SS claimers to be withheld if they work and earn over a certain amount. They don’t understand that the withheld sums will be returned via an increased benefit when they reach their normal retirement age (NRA).
If one continues to work after NRA, there is no longer a RET, but one will still be taxed if their Modified Adjusted Gross Income is too high. These folks often confuse the RET with paying income tax; a common comment from them is “I thought we didn’t have to pay tax on SS any longer”.
I would venture a guess that 99% of taxpayers do not know that the tax they pay on SS goes straight into the trust fund.
Yes, a brilliant idea.
“We need money to pay Social Security benefits – where can we get it?”
“I know, let’s tax Social Security benefits so we can continue for pay those benefits.”
Pretty much as I suspected. Thanks.
People don’t realize that SS is much more than a workers monthly retirement benefit.
Spouses, ex-spouses and children can collect benefits without paying a penny in FICA.
One thing I find interesting is that two workers with identical earnings and work records can get vastly different family benefits, one married and one single. Even if the marriage was only a year long the payment can be bumped up 50%
I’m also an AARP volunteer, Harold. This puts us in a spot for sure.
It would be easier to be a brain surgeon than to be a tax preparer. Fortunately AI will make both jobs obsolete.
Perhaps I’ll give brain surgery a try before AI takes over. Who wants to be my first victim….. I mean patient?
Well, if you can find the brain connection that stops me from running on with my mouth, Suzie will definitely give you permission 😉
Mark, I can think of a few people I’d love to experiment on, you nor any other HDers are among them. Suzie would not want me faffing about up there; I would only make things worse.
Being childless, I never got to file as head of household until my MIL and SIL came to live with us. Now, pushing 70, I finally have dependents.
You know what? It feels great.
I decided this year I’ll give the IRS more, rather than them saying I short-changed them. Grandkids can be the same way, but for different reasons.
I heard those, too in my 40 years as a CPA; many had their refunds spent before coming in!
That’s the good ol’ American consumer!
It will be interesting to see what happens, Dan. I have read that some people may get larger refunds in 2026 b/c the new withholding won’t be changed until then to reflect what is in the OBBB. (Like for tips and OT). I saw the Dinkytown calculator had been updated recently, and we will pay less than I had thought. I am going to wait until we do our taxes to see how much I need to adjust. Chris
I’m taking advantage of the new law by converting an extra 12K per year into a Roth while paying the same amount of tax as last year.
Still not sure I will be able to totally convert her entire traditional IRA over the next two years and still stay in the 12% tax bracket before I collect my maximum Social Security benefit in two years, and maybe not even before my wife turns 73 and would be required to take RMDs. Avoiding having to take RMDs from two accounts and having all her retirement account tax free going forward for our children to inherit is the goal.
I went ahead and canceled my last two estimates; I don’t like big refunds.
It sounds like you have decided to utilize the OBBBA senior deductions to go small on taxable income in 2025. I have yet to decide if we will go small in 2025 or do some Roth conversions to eat up our already paid in FWT or just get a larger refund than I had originally planned for.
Our current year taxable income is in the “tax torpedo” range so every dollar change of taxable income causes a $0.85 change in taxable our social security income.
My typical goal is to be dead even on taxes each year but I may break with my tradition in 2025.
I would be in the same situation as you. To Roth or not to Roth is more of a quandary when the conversion will affect your tax on Social Security. If volatility delivers a correction before the end of the year, I might lean towards the conversion even if it did cause more tax on SS.
Dan you have exactly described one of the reasons I’m focusing on trying to convert all of my wife’s traditional IRA to a Roth (while staying in the 12% tax bracket) before we collect our maximum Social Security benefits.
I’m finding that I’m having trouble emptying her account by Roth conversions due to the surge in the markets. I have read many financial articles that other seniors are having.
Truly a first world problem that we are blessed having.
Good stuff Dan. Informative and entertaining.
I bet you hear “why should I pay taxes, I paid my dues” or taxes are a scam, “they” are ripping me off. “They” never defined.
I don’t think most Americans make the connection between paying taxes and what they receive in return. And they sure don’t understand Americans are not highly taxed when compared with many other countries.
The reality is we need higher taxes and less new spending unfunded. The lack of a basic understanding of taxes and governments is sad in my opinion.
I think you’re correct, but I pity the politician who tries telling the truth about taxes.
I also wonder exactly who “they” are.
I don’t do taxes for others, but these are the kinds of topics I’ve read about through the years:
I shouldn’t owe money this year because I don’t have any leftover
Why can’t I claim my veterinary bills as a medical deduction?
I want to itemize AND take the standard deduction
Why do I need to supply proof for that deduction?
How do you know the IRS won’t accept that as a deduction (or credit)? Shouldn’t we just submit it and see if it works?
>>> and finally, a quote from my ex-wife, after seeing our tax return and seeing (separately) the balances on my 401(k) and her IRA: “Can we spend that?”
So many don’t understand why they owe tax on investment income saying “but I never received any money from the account”.
When married filing separately, people often want to take the standard deduction on one return, and itemize on the other. That is of course a no-no. And yes, many think you can piggyback both the standard and itemized deductions.
One friend of mine is retired with an okay pension, and a couple hundred thousand dollars in an IRA. Like your X, his wife wanted to spend it. I explained to her that his fixed pension would lose buying power due to inflation, and that she, like her mom, may live into her 90s. Also, she would lose some SS income if her spouse croaked first, so she would eventually need that IRA money to get by.