Top Questions about Taxes, Answered
Check out this year’s list of most commonly asked tax questions. You may find answers to one of yours!
The April 18th tax deadline is tomorrow, and you may be left with some outstanding questions. TurboTax released this year’s list of the top five most commonly asked tax questions. Some of the questions are consistently asked each year, others fluctuate with the economy.
Every year people want to know where their refund is, who they can claim as a dependent, how bonuses are taxed, and what deductions they can take. New to this year’s list is increased interest in how working in the on-demand economy or being self-employed impacts taxes.
If you have any of these same questions — read on.
Every year, this is consistently the most common search on the TurboTax blog, and for good reason. Last year, about 75% of taxpayers received a tax refund and the average refund was close to $2,800. For many, their tax refund is the largest paycheck of the year.
If you’ve filed your tax return and are awaiting a refund, the IRS expects to issue nine out of 10 federal tax refunds within 21 days of acceptance by the IRS for those who e-filed with direct deposit. E-file with direct deposit is the fastest way to get your tax refund. Once you’ve e-filed your tax return, you can check status of your federal refund using the IRS tool Where’s My Refund?
2. Can I claim my mom/dad, boyfriend/girlfriend, dog/cat as a dependent?
The short answer: maybe. The bottom line is a dependent must be your “qualifying child” or “qualifying relative” and meet specific tests for you to claim them. Many people are surprised to find they may be able to claim a live-in boyfriend, girlfriend, domestic partner or friend as a qualifying relative in some cases. Claiming dependents can give you a tax deduction worth up to $4,050 per dependent, and also make you eligible for many other tax deductions and credits.
However, you cannot claim your furry little friend as a dependent. Although the IRS doesn’t specifically spell it out, it is tacitly implied that dependents — at least for taxation purposes — must be human. That said, if you have a business and you have a guard dog protecting your business or your cat provides pest control, you may be able to deduct some of the expenses directly related to taking care of your pet, as long as the expenses are reasonable.
Needing a dog for medical reasons like a seeing eye dog may also help you garner a medical expense deduction related to the money you shelled out for your pet.
3. How is my bonus taxed?
Bonuses are considered supplemental wages and, as such, taxes are withheld differently from ordinary wage or salary income. There are two methods employers use to withhold taxes from bonuses: the percentage method, which is a flat 25% withholding on the bonus amount, and the aggregate method, which is generally a higher withholding based on a higher tax rate due to your bonus and regular paycheck being combined. The method used to withhold taxes can depend on and how your employer wants to handle it and whether your bonus is paid together with your paycheck.
One thing to remember is although you may have been taxed at a higher tax rate when your bonus was paid, you may see some of it back when you file your taxes since your tax rate when you file is based on your overall tax rate.
TurboTax has a handy bonus calculator that allows you to get an estimate of how much federal taxes will be withheld from your bonuses when they are paid.
4. I became self-employed and started working in the “on-demand” economy in 2016. Does that change my taxes?
There are more than 55 million Americans who are currently self-employed (freelancers, independent contractors, etc) with one in five Americans becoming newly self-employed every year. Among them, more Americans are working in the new, on-demand economy than you might imagine. Intuit research shows 3.2 million Americans are already working as part of this new economy, and that number is expected to grow to 7.6 million by 2020.
You may not think of yourself as self-employed as you engage in your on-demand economy gig but the IRS does. Working in the on-demand economy (i.e driving for Uber or Lyft, or delivering with Instacart or Postmates) allows you to take tax deductions you may not be eligible for as solely a W-2 employee. To help make sure your side gig is profitable, take advantage of business expense deductions, like start-up costs, office and vehicle expenses, and computers.
For self-employed individuals, TurboTax Self-Employed will ask simple questions about you and your business and help you uncover deductible business expenses you may not even know about.
5. What are the most commonly missed tax deductions and credits?
Knowing the tax deductions and credits available to you is a big part of ensuring you get as much money back as possible. Luckily, TurboTax automatically checks for more than 350 deductions and credits. Here are some of the commonly overlooked deductions and credits:
Education expenses: Education expenses for higher education are deductible for students enrolled in school at least half-time, but even causal learners can get a tax credit.
Moving expenses: Your moving expenses are tax deductible if you change jobs and your new job is at least 50 miles farther from your old house than the distance between your old house and your old job; and you work at least 39 weeks during the year after the move.
Home Office: If you use part of your home regularly and exclusively for your business, you can claim a home office deduction for a portion of your utilities, rent, mortgage interest, property taxes, depreciation, cleaning and the like, based on the square footage of your home used for your business.
Points Paid on your Home Loan: If you paid points when you bought a home, they are deductible in that year. Points paid to refinance a loan must be written off over the length of the loan. If you refinance again, don’t forget to write off the remaining points in the year you refinance.
Mileage Expenses: If you use your vehicle for business, you can deduct your mileage (54 cents per mile for 2016). If you have more than one job, the cost of traveling between your work locations is tax deductible as well.
Self-Employment Tax: If you are self-employed you have to pay what would be the employer portion and the employee portion of Social Security and Medicare taxes, but IRS gives you a break and allows you to deduct half of your self-employment taxes (7.65%).
If any of these questions were stopping you from filing your taxes — now you can sail through the process and get back the money you deserve. Tax Day is just around a corner — it’s time to file!