What an interesting 2018 income tax filing season we just experienced…
Major changes to the federal income tax code became effective for 2018 under the Tax Cuts and Jobs Act (TCJA). Most individual income tax filers were affected, some positively, others not so much.
Certain owners of flow-through businesses such as sole proprietors, S corporation shareholders, and partners in a business.
The Qualified Business Income Deduction (QBID) was of great value to those businesses that don’t just render professional services. The result for qualified businesses was a 20% reduction in their share of taxable income generated by a flow-through business. Unfortunately, outside of certain income thresholds, Specified Service Trades or Businesses (SSTBs) do not qualify for the QBID. SSTBs include accountants, lawyers, medical professionals, professional athletes, entertainers, wealth managers, and others. But owners of rental properties were mostly eligible for the QBID.
Additionally, the child tax credit doubled from $1,000 to $2,000.
Many taxpayers who itemize their deductions on Schedule A of Form 1040.
While the standard deduction was roughly doubled to $12,000 single/$24,000 couples, personal exemptions (who ‘claims’ who) were eliminated for federal income tax purposes, so many more tax filers claimed the standard deduction rather than itemizing. But for those taxpayers who counted on large itemized deductions for such things as taxes, unreimbursed business expenses, and other miscellaneous expenses, the outcome for 2018 was a significant increase in taxable income.
The deduction for state and local income taxes coupled with real estate taxes is now subject to a $10,000 cap. You paid $100,000 in such taxes? Your deduction is $10,000. That’s pretty harsh.
Miscellaneous itemized deductions have been wiped off the map, meaning legal/ professional and wealth management fees are no longer deductible. Also included in that category are out-of-pocket expenses incurred on behalf of one’s employer, which can be very detrimental to employees who drive a lot of miles, claim a home office deduction, and pay for other employment-related expenses. I have often suggested that employees who are negatively impacted negotiate with their employers for a reimbursement in lieu of a like reduction in pay. The employee ends up whole and in fact saves on the Social Security and Medicare taxes they pay through payroll deductions. Likewise their employer saves the matching Social Security/Medicare tax. This tactic is more likely to work with small employers.
So the 2018 tax season resulted in a mixed bag of results for individual income taxpayers. Many received lower refunds or ended up owing the IRS (who publicly acknowledged doing a poor job of adjusting the federal withholding tax tables to reflect the new tax law).
Review Form W-4
In an attempt to avoid a negative tax outcome for 2019 we highly recommend that employees review their Form W-4 on file with their employer, which authorizes their employer to withhold federal (and state) income tax based on tax tables conditioned upon marital status and ‘exemptions’.
Since there are no longer personal exemptions for federal income tax purposes, you should not be claiming the combined number of your household members as withholding exemptions. My advice would be to claim one exemption for your marital status. It can always be adjusted subsequently if the resulting withholdings are out of alignment with your expected tax liability for the year. Most CPAs, including us, can drop the numbers into tax projection software to gauge that anticipated result.
In the meantime, best wishes for the remainder of 2019. If there’s any way we might be of assistance, please don’t hesitate to contact us. As I always try to emphasize, we are here to help.
~ Kathy Lyle, CPA