Monday, April 22, 2019

Trump Tax Law Post Tax Season Thoughts

If you bought my book on the subject, this post will expand upon some lessons learned following the first full season of implementation. The book was accurate, but there were definitely some lessons learned. I will write this post as best I can such that anyone can use it, even if they didn't buy the book (which is pictured in the upper right corner of this blog and a click there will get you a copy...hint...hint). I'm going to reluctantly start with some politics, just because I'm baffled by the big mistake made in implementation. It will be directed at Trump and the GOP, but you shouldn't take any partisan bent away from it, it is just about the law and political advantage, not a critique of any political philosophy.

Politics: Adjusting the withholding tables for the new tax rates AND doing a bad job of it was a HUGE political mistake. The tax cut was pretty nice for most people, but spread out over 20 plus paychecks it had almost zero perceivable impact. If they had left the tables alone, the narrative right now would be about bigger refunds, not smaller ones, and that would temper some of the negatives going on right now (Mueller Report). Instead, people are pissed off about their refund AND dirty politics (as if there is any other kind). Okay...enough politics.

Now onto what I learned or want to emphasize from doing a few hundred tax returns under the new law:

1. There is still a bit of adjustment being accounted for in the new new tax tables, so if your refund dropped in 2018, it will drop a tiny bit more for 2019 - assuming all things being equal year over year. I still highly recommend using the withholding calculator to ensure you get results in the area you want.

2. The new tax rates were a big deal, especially at the higher rates. This plus the higher limit for the Child Tax Credit were the largest impact on families in the solid middle class ($100k plus income).

3. The loss of the personal exemption for everyone in the family had some unique impacts. Even though many people had lower taxes, their actual taxable income was higher (made up later by higher credits for children). People who had good itemized deductions were hurt the most, due to not feeling the effect of the new standard deduction. I think the biggest impact of the higher taxable income was in how it affected the taxability of long term capital gains and qualified dividends. While the new tax law technically decoupled the lower capital gains rates from tax bracket, it is still closely tied with taxable income. This means that more capital gains will be taxed at rates higher than zero and more near the maximum rates. It also had impacts on Foreign Earned Income Exclusion tax rates and the 20% "pass-through" deduction for businesses.

4. Speaking of the 20% pass through deduction...what seemed like a very simple deduction (as long as you were below the taxable income limit at which restrictions applied) turned out to be much harder. Hard enough that it seems to have baffled some software programmers. If you filed very early, you might want to double check that your software did it correct. I'm not going to hit the details, but just be aware that "20%" didn't turn out to be 20%. I had one client who hit the income limit where restrictions came into play and it was a big deal. The convolutions that came into play at that point caused me to recommend that he seek additional help from a CPA experienced in partnerships and S-corporations so that he could explore changes in business structure and methods of sub-contractor payments to maximize the deduction. If you are near the income limits ($315,000 for MFJ and $157,500 for others) and this limit applies to you, seek experienced professional help NOW!

5. Many fewer people took the standard deduction, but this doesn't mean you can ignore it. If you are a regular contributor to charities, paying attention to how close you are to exceeding the standard deduction, and then grouping donations for maximum affect in a single year can be very rewarding in the year you itemize, as opposed to just donating willy-nilly without concern for taxes.

6. If you have a child in private school, you should explore your states laws regarding 529 plan contribution and withdrawal timing, as well as if you get a deduction for contributing. It is possible to route money you were already going to spend on school through a 529 plan and get a tax deduction for something you were already doing.

7. You don't have to have health insurance now to avoid a penalty.

8. If you had significant employment deductions, you already know you took a big hit. For others, you get NO deductions for work expenses as an employee. You can stop asking about clothes, uniforms, tools etc.

9. The above said, many people confused expenses for BUSINESSES with expenses for EMPLOYMENT. As an employee, you get no work expense deduction. If you are a business (paid on a 1099MISC or tracking your own income) your deductions were not significantly changed. The mileage deduction didn't go away, it was just eliminated for employees.

10. Starting with divorces completed in 2019, alimony is no longer deductible to the payer or added as income to the payee. Make sure you take this into account during divorce proceedings. Lawyers and judges will be slow to recognize the significance of this change.

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