A Tax Season with a Surprise

Lawmakers promised that the TCJA (Tax Cuts and Jobs Act of 2017) would allow taxpayers to file their tax returns on a postcard. True, the new Form 1040 is half a page long. But, just about every line requires a detailed accompanying worksheet to provide backup for the calculation for that item.

They also promised it would be simplified. There has been so much confusion about the new tax code, that CPA’s had to wait until near the end of 2018 for the IRS to define and clarify many new rules related to SSTB’s (Specified Service Trade or Business). Well, not only is the new tax code more complex, it guarantees job security for CPA’s for years to come.

Included in the SSTB is the Qualified Business Income (QBI) for owners of flow-through entities such as sole proprietorship, S corporations, partnerships, LLC’s and others, that offers a new 20% deduction. But even this deduction is limited and subject to phase-out rules.

In the run up to April 15th, there have been many reports from taxpayers nationwide who expected tax refunds, but found out to their chagrin that they are now paying more in taxes. The limitations of SALT (State And Local Tax deductions) to $10,000 is one big factor that taxes have gone up for many, despite a (temporary) reduction of tax rates.

Looking for the silver lining – the new Tax Act may have resulted in new challenges, but it has also created opportunities.

Fewer taxpayers will itemize. The Standard Deduction has doubled to $24,000. However, by bunching together charitable and other deductions in one tax year, it may be possible to itemize rather than taking the Standard Deduction. The team approach to planning has never been more important, as Financial Planners, Accountants, and CPA’s will be busy helping their clients keep track of deductions and finding ways to reduce the tax bite.

Employees may contribute more dollars this year to their 401(k) and IRA and other retirement plans. Ask me how much you can contribute to your plan(s).

Investors with large unrealized capital gains tax (either in their investment portfolio or a real estate asset) may be able to participate in a Qualified Opportunity Zone investment. An investment in real estate to revitalize an area specified by states’ governors may allow you to deduct, defer, and possibility eliminate capital gains tax. But buyers beware! The final rules on these Opportunity Zone investments are yet to be issued by the IRS, and there are sure to be a flood of new offerings by sponsors with varying expertise.

While tax brackets have been reduced under the new tax law, Roth IRA conversion is a strategy to be revisited for IRA investors. There are no Required Minimum Distributions (RMD’s) for Roth IRA’s during the owner’s lifetime. There may be Required Minimum Distribution for Inherited Roth IRA, however, distributions are tax-free. Ask me for details.

Another caveat – while the tax law is the law for now, a new administration in the White House could reverse course on many of the changes, making the Tax Cuts and Jobs Act a one-year-at-a-time tax code.