Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Incorporated. A registered investment advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, it is the third Wednesday of the month. It is March, and I was able to steal Andy out of his…
Andy Fergurson:
Nerdery.
Nate Kreinbrink:
His nerdery, his wing, his home for the last couple months, but it is winding down, it is moving along. We’re getting there.
Andy Fergurson:
We may be on the backside of the mountain. I wouldn’t say that we’re winding down but we’re…
Nate Kreinbrink:
Yeah. Less than a month. Again, baseball season is starting so you know that is coming up.
Andy Fergurson:
That is the indicator.
Nate Kreinbrink:
And that is the indicator that you are getting close to it so.
Andy Fergurson:
Yeah, the cardinals are knocking on my window, literally, like the cardinals come and knock on my window every morning.
Nate Kreinbrink:
Just to give you that heads up, Andy.
Andy Fergurson:
They’re just telling me, “Hey, we’re back in town, so.”
Nate Kreinbrink:
We are back in town. Let’s see is hitting on the radio today that the major league first game is a night or two away, and they are playing it overseas, and it counts in the standings.
Andy Fergurson:
Cardinals don’t start until April I think. So the first game is like two weeks before the rest of the season?
Nate Kreinbrink:
Yeah. Then they come back to spring training and then…
Andy Fergurson:
That’s weird.
Nate Kreinbrink:
Fun stuff. Anyways, let’s get into our show taxes. We are into it. As we just mentioned. You are seeing obviously the flow of people coming in. You are into a groove. You are seeing some things, kind of a redundancy I think on a lot of returns here. One of them that you had mentioned to me was those who have children, those who have kids, and kind of when to claim them on there and then when the child themselves should maybe claim.
Andy Fergurson:
So there’s a lot of confusion around when and when you should claim your kids. Some people know, some people don’t know. You get a child tax credit for your kid until they’re 16 years old, until the year they’re 16. So the year they’re 17, you no longer get that child tax credit. That changes to another dependent credit. That’s a $1,500 swing in credits. And so some people think that they can’t claim their kids if they’re 18.
Well, the truth is that you can claim your kid until they’re 26 if you want, or I’m sorry, 24 if they are going to school. So if they’re a full-time student, they’re in college, you can claim them if you’re providing more than half their support. And the question then becomes, well, if I claim them, do they have to file their own return?
Nate Kreinbrink:
Right, and the laws are different just because of where you live at. Those laws are different.
Andy Fergurson:
So there’s a couple reasons to file for a child’s return. The first reason you would file a kid’s return is if they have withholding. So if they worked a part-time job in the summer, even if they only made $800, if their job withheld money from their check, they made $800 and they withheld 25 dollars from the Fed and maybe $15 from the state, that child is due back that money, that 25, that 15 should come back to them.
Now you got to find a way to file it for less than 25 or 15 if you’re going to make money on that transaction. But by law that 25 or 15, they don’t owe that tax. So filing to get the refund is one reason. And the other reason is are they going to owe tax? And this is something that’s confusing to people, but if you live in Iowa and if you live in Illinois, it’s different on how much money your kid can make before they’re going to actually owe tax to the state entity.
On the federal they’re not going to owe tax until they make $13,000. On the state level Iowa just this year now starts to match the federal. So they can make $13,000 before they’re going to owe tax in Iowa, but in Illinois the number is much lower. So if they make $2,000, they’re going to owe tax or more than $2,000, they’re going to probably owe tax in Illinois. So it’s just when and where to file them. The other thing is if your child goes to claim or goes to file their taxes, it’s important, especially if they’re going to go use a free file site or one of those sites where they’re going to go just type in their information. It’s important that you do your return before they do their return. Because if they go in and they claim themselves as independent, they’re not a dependent on another’s return, and then you later go to claim them as a dependent, your return will be rejected.
Because when it comes to that social security number, whoever claims first is going to be the one that gets it. And then once that social security number is being claimed, there’s not a lot you can do about it other than paper file. It won’t make any difference on their return more than likely. But on your return, it’ll make a big difference. And so it’s important to make sure that you hold that kid back and keep them from filing until after your return is filed and accepted. That way they can’t make a mistake and accidentally claim themselves. I’ve seen it happen a hundred times. And then parents who are going to get maybe $2,500 worth of credit by claiming their kid aren’t getting, or they get a paper file and wait for several months to get that refund, plus all the other credits that they’re getting because they have to paper file. All because the kid went to a free file site, didn’t really understand the question and pick the wrong box.
Nate Kreinbrink:
One box with it. So as we go into this, obviously the theme over the last couple years and what we talked about is each year is different. There’s always changes, there’s always amendments, there’s always different laws, different things. As we go into this year, maybe touch on a few of those changes that you have saw and just touch on how they’re briefly impacting the individuals that are filing their returns for that one.
Andy Fergurson:
Yeah, the big one this year is Iowa. Iowa changed their law in 2023, making it so, the big headline from their law change was that those that are over 55 weren’t going to pay tax on retirement income. And then the other one was that the tax rate was going to drop for those that were in the top tax bracket. And so both of those things were significant, but one of the subtle changes that happened that we didn’t hear much about was the way that we’re going to itemize our deductions in Iowa. So it used to be you could take the standard deduction on the federal form, but then you could itemize your deductions on the Iowa form and you could even split your Iowa form into married filing separately, but combined. And what that did is it took spouse income and taxpayer income and separated them all the way through the form and then combined them at the last second when it just added tax together.
Sometimes that was advantageous, sometimes it was disadvantageous. You could do it both ways. You could itemize on the Iowa form and not itemize on the federal form. Well, with this last change, now Iowa is making you take the standard deduction if you took the standard deduction on the federal form. And so that is significant for those that used to be able to itemize on the Iowa form, but not on the federal form specifically because of the way the withholding tables changes. So when the Iowa tax rate drops or anytime any tax rate drops, whether it’s the federal, the Iowa, the Illinois rate, anytime any rate drops, the withholding tables change with that rate. So if Iowa projects that the tax rate is going to drop, employers will withhold less money from your check because the tax rate is dropping. And so when the standard deduction increased in Iowa, so instead of it being a small number where you could itemize, it went to the standard deduction that the Fed gets, the tax withholding dropped for most people.
And so what we’re seeing is we’re seeing a lot of people in Iowa who have relatively close to the same amount of income. They have less taxable income in Iowa because of the change to the tax law. However, their refunds are smaller and they’re smaller because their withholding changed. And they’re telling me, oh, I didn’t change anything. Well, no, you didn’t change anything. The withholding table changed. And so Iowa’s kind of a moving target this year. It’s one of those things that you just got to make sure you pay real close attention to. The top rate in Iowa in 2023 was 5.7. It’s going to move down again, I don’t remember what it’s going to be in 2024, but it’s going to be closer to five. And so we just want to make sure that if you’re somebody who makes money, you want to make sure that you’re getting about 5% of your income out of Iowa. So if the rates are moved down and you’re looking at your paycheck and they’re not taking anything or they’re taking 2%, you’re going to.
Nate Kreinbrink:
You’re going to settle up a tax time.
Andy Fergurson:
You’re going to settle up a tax time. I make a concerted effort to try and put a little more money in during the tax year. Or you may be looking at the backside of a 200 or 300 or $400 tax bill come tax time. And anytime you take a bill like that and divide it by your 26 pay periods or your 52 pay periods, it’s a little bit easier to swallow. So you might want to put two or three or $5 in extra on Iowa to cover that because we don’t know where it’s going to land.
Nate Kreinbrink:
When you go into there. I know we’re getting close to time, but another topic that we mentioned here briefly, but with Iowa on the W4 and understanding, checking how you want your withholdings taken out, not necessarily again on the form, it’s not an indication of what your status is. It’s how you want your taxes withheld as that. And that is the married filing jointly or filing as a single. And again, that is not just a reflection of what your status is. It is how you want to withhold your taxes. And I think that’s a misconception that a lot of people, again, don’t understand. So they fill it out wrong or…
Andy Fergurson:
Or they try to fill it out and they don’t know what right is going to do for them. So if you fill that form out completely right, and put all the information in the way that the worksheet tells you what should happen is you should get a zero refund on your tax return. They should hold exactly as much money out of your check as you are going to pay in tax. That’s what that form’s designed to do. What you have to understand is that W4, as you put numbers into that W4, what it is doing is it’s excluding income from the withholding calculation. The more numbers you put on the form, the less it’s going to withhold. So if you want more withholding, you put less information on the form. And so when people come to me and they say they want more withholding, I say the best way to do that is you put zeros on that form. More withholding is less exemption. And so that’s the simple answer, and we don’t have a lot of time to talk about the rest of it.
Nate Kreinbrink:
And just with that too, that form is just specific to that job.
Andy Fergurson:
Yeah, just go to HR.
Nate Kreinbrink:
Looking at, and that form is not taken into account if you have a second job or if you have another employer or whatever.
Andy Fergurson:
Or social security or retirement income, absolutely.
Nate Kreinbrink:
Just looking at income from there. So you need to take that accordingly. So again, Andy, it is the third Wednesday of the month. I appreciate you taking time to come and joining us today. It is always great to talk taxes. Did want to mention though, before we are out of time that every Friday, NelsonCorp Wealth Management, Nelson Corp Tax Solutions are wearing jeans for charity. Money raised in the month of March. We’ll be donated to the Kiwanis Club here in Clinton. Again, Andy Ferguson with Nelson Corp Tax Solutions, Nate Kreinbrink with Nelson Corp Wealth Management, bringing you this week’s financial focus. Thanks again for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research Incorporated, a broker, dealer member FINRA, SIPC, investment advisor. Representative Cambridge Investment Research Advisors, incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website@www.nelsoncorp.com.