By Megan Reese, politics and government reporter
Photo courtesy of Dr. Michelle Harding
According to Benjamin Franklin, there are two things certain in life: death and taxes. Because of that, it is important to understand what you are paying and why you are paying it.
Jan. 26 marked the first day of tax filing season for Americans, and this time of year can be extremely stressful and confusing. Each year there are new laws and regulations put into place by Congress, and most people don’t have the time to fully understand what they mean.
U.S. Rep. Morgan Griffith, R-Va., of Virginia’s 9th District, recently wrote an article for NRVNews.com explaining how the new reconciliation package, called the “Working Families Tax Cuts,” could affect Southwest Virginia.
I spoke with Dr. Michelle Harding to discuss the basics of tax filing season, understand the new policies and how they will impact the local residents. Harding is a licensed certified public accountant specializing in taxation, and she joined the Pamplin College of Business in 2017 to teach the next generation of accounting professionals.
Harding’s comments were edited slightly for length and clarity purposes.
Can you give a quick summary of what tax filing season is?
Every year, people who have an income have to file a tax return. There’s some requirements where if your income’s below a certain level, you may not be required to file a tax return. But, if you have wage income, that means your employer has likely already deducted taxes. So, even if you’re not required to file a tax return, you should anyway in order to get a refund of those taxes that you’ve already paid.
What we typically think of as tax filing season is that employers are required to give their employees a W-2 form, which is their annual wage report for all the income they’ve earned over the last year, by Jan. 31. Basically, tax season is the time when you receive that W-2 wage report from your employer, until the April 15th filing deadline.
What is your overall main advice to young people and families going through this tax season?
When you get a W-2, 1099 form or your annual bank interest statement, those businesses are sending you a copy, but they’re also sending the IRS a copy. It’s really important that you pay attention and make sure you include all of your sources of income in your tax return.
Often people are just intimidated by taxes, it seems overwhelming and daunting. For people whose primary source of income is their paycheck, they absolutely should not be intimidated by this process because their W-2 is the main piece of information they need to file their tax return. Most Americans will actually receive a refund. So yeah, that’s good news.
There are also free tax filing services available. The IRS has on their website, it’s called IRS Free File. If your adjusted gross income is less than $89,000, then there is this online service that’s free for you to file your taxes. Also, the New River Valley Community Action Group sponsors VITA, which is Volunteer Income Tax Assistance. I definitely encourage people to take advantage of those resources.
Every year we see changes in tax policy, which directly impacts taxpayers. Can you explain, in plain terms, what the “Working Families Tax Cuts” are designed to do?
Tax deductions are rules that Congress passes. That’s another misconception. People blame the IRS, but Congress passes tax laws, and the IRS is responsible for enforcement of those tax laws. Every year Congress decides how much each taxpayer is allowed to deduct. So, every taxpayer gets a standard deduction, and that standard deduction reduces the amount of your income that you have to pay taxes on. It is a flat amount that everyone gets based on their filing status.
The first change under these “Working Families Tax Cuts” is that the amounts increased a little bit more than they usually do from year to year. That’s Congress saying, we’re allowing you to pay taxes on less of your income.
Then we get into some other very specific targeted tax deductions. For taxpayers that are 65 and older and have other sources of income, they get an extra $4,000 of standard deduction.
Also, qualified tip income. This is going to benefit people who work in service industries where a lot of their income is from tips. You’re able to exclude up to $25,000 as a single person. But if you’re married filing jointly, up to $50,000 of your income. That can be quite meaningful to people who get a lot of their income from tips.
There is also a new deduction for qualified overtime compensation. People who are paid on an hourly basis, if you work more than 40 hours a week, you’re entitled to overtime.
Based on what we know, how might these tax cuts affect working families in Southwest Virginia or the NRV specifically?
So if you qualify for these taxes; if you have tip income, if you have overtime income or if you’re 65 or older, these things will benefit you. But if I am a salary worker, for example, let’s talk about Virginia Tech. An administrative assistant may make $30,000 a year. So they have no tip income and they have no overtime income because they’re a salary employee. So, none of those deductions will benefit them. Now, everyone having the higher standard deduction will likely provide some tax relief. That effect is likely between $100 and $200 if your income is around the national salary average of $62,000, which again, more tax saving is always better.
Would this policy meaningfully change the tax filing experience? Would filing taxes become simpler, more complicated, or mostly unchanged?
It’s definitely not becoming simpler. Because as I described those tax deductions, there are a lot of if-then statements. So what will I advise them? Number one, don’t be intimidated by the process, especially if your income is primarily a W-2 and then you have some interest from your savings account. That’s a very straightforward tax return. If you know how to use a computer and the internet, using one of the free online tax filing resources, should be a really straightforward experience. So don’t be intimidated by it because the tax software walks you through the process.
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