Maggie Klokkenga, CPA, CFP®, provides insights into the new tax law and the standard deduction.

We've gathered your inquiries! Due to the overwhelming response regarding tax queries leading up to the podcast with Maggie Klokkenga, CPA, CFP®, we couldn't address them all in Mailbag. Therefore, Maggie is here to tackle your questions, organized by topic. Let's dive into her answers about the standard deduction.

First off, kudos to you for all your side hustles! We'll address your questions one by one.

Here are some changes from the new tax law affecting self-employed individuals:

  • The Tax Cuts and Jobs Act introduced a pass-through deduction under Section 199A, known as the Qualified Business Income (QBI) deduction. This allows up to 20% of Qualified Business Income from various business structures—like sole proprietorships or partnerships—to be deducted on your personal tax return. This deduction phases out if your taxable income surpasses $315,000 for married couples filing jointly or $157,500 otherwise. Various limitations apply, but most tax software will help you determine your eligibility, so make sure to use one that accounts for business income. Consult your tax preparer if you have questions.
  • Additional changes include an enhanced depreciation deduction for vehicles used for business purposes. Meals remain 50% deductible, while entertainment costs are no longer eligible for deductions.

Regarding your next question: Yes, you can still deduct your business expenses against 1099 income while also taking the standard deduction on your personal return. These are treated as separate deductions: Business expenses are reported on Schedule C, and the standard deduction is entered on Page 2 of your tax return.

Now, about quarterly tax payments. If you expect to owe over $1,000 when filing your tax return, consider adjusting your payments to avoid underpayment penalties. You can do this in two ways: by increasing withholdings on your W-2 job or by making quarterly payments.

  • To increase your withholding: File a new W-4 with your employer. If you are in a state that collects income tax, submit both federal and state W-4s. It may seem counterintuitive, but to raise your withholdings, you should claim fewer exemptions on the W-4. For maximum withholding, indicate that you are filing as single or married but opting for the higher single rate, claiming zero exemptions.
  • To make quarterly payments: Start by subtracting any applicable deductions from your 1099 income. Check the 2019 Tax Rate Schedules at www.irs.gov to calculate your ordinary tax liability. Since 1099 income is classified as self-employment, 92.35% of this income is subject to an additional 15.3% tax. Combine the two liabilities and divide by four to ascertain your quarterly payment amount.
    • For instance, if your 1099 income totals $12,500 and you have $2,500 in business-related deductions, your net income would be $10,000. Thus, $9,235 (which is 92.35% of your self-employment income) would be taxed at 15.3%, resulting in $1,413. For ordinary tax, $9,235 taxed at the 10% rate yields $924. The total tax of $2,337 divided by four gives a quarterly payment of $585 (rounded). This example doesn't consider any other income or deductions that might affect your estimated tax calculations.

If the standard deduction covers my typical expenses, can I combine last year's and this year's expenses next year to exceed the $12,000 deduction?

Unfortunately, you can only claim expenses in the year they were incurred. So, the answer is no. However, there's a strategy called lumping or clumping, which might help. Essentially, you group all your deductions within the same tax year to maximize your itemized deductions. This can include grouping charitable contributions. If you're inclined to donate, consider establishing a donor-advised fund. You can make contributions to the fund for a deduction this year while delaying grants to various charities until future years.

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