Taxpayers may feel like they’re entering into the vast unknown this tax season. It will be the first year that many filers will face their new tax liability under President Donald Trump’s tax reform. And…
Taxpayers may feel like they’re entering into the vast unknown this tax season.
It will be the first year that many filers will face their new tax liability under President Donald Trump’s tax reform. And for these filers, how their tax liability will look remains mysterious. “There will be some people who will be surprised,” says Lance Christensen, certified public accountant and tax practice leader and partner at Margolin, Winer & Evens in Garden City, New York. “Hopefully they’ll be pleasantly surprised.”
Experts warn that there may be delays and confusion as the IRS, tax-filing software providers and tax preparers integrate the Tax Cuts and Jobs Act into their filing and processing systems. In the meantime, you can use any time before the new year to start considering what your tax bill will look like and make preparations.
So will you thank or curse Trump when taxes are due? Like any question that involves taxes, the answer is: It depends.
The group of taxpayers who will be thanking Trump the most are a certain subset of qualified business owners, experts say. “The real winners are individuals who own businesses through pass-through entities, through partnerships and S-corporations,” Christensen says, referring to businesses that pay taxes at their owners’ individual tax rates.
Under the new tax law, qualified business owners may see a federal tax reduction by as much as 20 percent. But, experts warn, there are limits on who can qualify for this cut. “It’s not across the board,” says Juan Montes, enrolled agent with TheTaxProblem.com, a firm with offices in Ceres and San Jose, California.
The classification is a little complicated, but essentially to qualify, single filers may have no more than $157,500 in taxable income, while those who are married filing jointly must have less than $315,000. Above those limits, there are restrictions, largely applying to what’s called a “specified service trade or business,” which includes doctors, accountants, lawyers and other professionals. These specified business owners lose the tax break if their income exceeds $207,500 as a single filer or $415,000 if they’re married filing jointly.
There’s a lot of confusion about which kinds of professionals qualify for this tax benefit, both at the IRS, which is still ironing out the details, and among clients, says John R. Dundon II, a Denver-based enrolled agent, president of Taxpayer Advocacy Services and fellow at the National Tax Practice Institute. Small business owners should educate themselves and not assume they’ll qualify, Dundon says. “If they have a relationship with a preparer, call their preparer. Hold their feet to the fire. If the preparer doesn’t seem to be knowledgeable, now is the time to switch preparers.”
Among those who might be cursing Trump are taxpayers in high-tax states who were accustomed to deducting state and local taxes on their returns. Tax reform limits deductions for these personal taxes, which are commonly called “SALT” taxes, to a total of $10,000.
“Every single one of my clients in California and New York are just beside themselves,” Dundon says. “They’re the highest earners and they’re also the most leveraged, and they’re the ones that historically would be claiming $50,000, $60,000, $70,000 in itemized deductions because their property taxes and state and local income taxes are so high, and now they’re capped at $10,000.”
Outside of those two major categories, tax filers may see more modest changes. For example, a big family that loses a tax benefit with the loss of personal exemptions may be soothed by the expanded child tax credit of $2,000 per child and new rules regarding the use of 529 education savings plans. Other taxpayers mourning the inability to deduct casualty and theft losses unless they live in a presidentially declared disaster area may be comforted by the increase in the standard deduction to $12,000 for single filers ($24,000 if married filing jointly).
Some tax experts predict that most filers will be thankful for tax reform, especially because tax rates were lowered. “I think the vast majority of people will be definitely pleasantly surprised,” says John Vento, author of “Financial Independence (Getting to Point X): A Comprehensive Tax-Smart Wealth Management Guide” and a New York-based advisor. Others think that confusion and delays associated with implementing tax law changes will have most people peeved. “I think more people are going to be annoyed, and it has nothing to do with money,” says Montes, who also predicts that more people will need to work with a professional tax preparer this year to navigate the new laws.
Others may be surprised that tweaks to tax withholding, which helped increase their paychecks at the beginning of the year, may result in a smaller tax refund or even a tax bill. If you’re concerned, take the time before 2018 ends to check your withholding. “If you owe too much, you’ll get hit with a penalty to make estimated payments,” Dundon says.
If you’re worried about your 2018 tax bill, the best thing you can do is meet with a preparer or trusted advisor to determine what you can do before Dec. 31, 2018, to reduce your tax liability, Vento says. You may be able to fund retirement accounts, health saving accounts, schedule necessary medical visits or claim investment losses to reduce your tax bill. If you miss the year-end tax-planning deadline, schedule your visit to the tax office in early 2019 to avoid the late-season rush. Says Vento, “You don’t want to show up at your accountant’s office on April 15 and say, ‘What can you do for me?'”