What to Expect this Tax Season

Although we’ve been talking about the “new” tax law for over a year, this April is when we really start to notice what has changed – and what remains uncertain.

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Although we’ve been talking about the “new” tax law for over a year, this April is when we really start to notice what has changed – and what remains uncertain.

Although we’ve been talking about the “new” tax law for over a year, this April is when we really start to notice what has changed – and what remains uncertain.

For starters, the format of the 1040 has been made over. Now, the first two pages are postcard-size; should an individual have a more complicated situation, they will then need to fill out six supplemental schedules with additional information. This new format takes the place of the 1040-EZ and 1040-A forms; individuals that previously used those abridged forms will now fill out only the first two pages of the revised 1040. Given that the 1040 has remained the same for decades, this image adjustment will be a big surprise for many.

Next, many taxpayers will be surprised at their bottom line once they complete their tax returns. The new tax law was pitched as a tax cut for everyone, including the middle class. While that might be the case, the government changed the withholding tables on wage earners during the year, so much of the refunds taxpayers were expecting upon filing their returns have already been received as higher take-home wages. Therefore, many may be chagrined to see that they will not be getting a larger, or any, refund this year.

Another change that has received some strong notice already is the standard deduction. The combination of the nearly doubled standard deduction and the limits on certain itemized deductions is resulting in many more taxpayers claiming the standard deduction. As a result, some may lose the benefits of itemized deductions like charitable contributions, medical expenses, mortgage interest and state and local taxes.

For those taxpayers who still can itemize their deductions, there has been a bit of confusion regarding the deductibility of interest on home equity indebtedness – the way the law defines home equity indebtedness is different than the way banks and mortgage companies define it. For example, if an individual goes to a bank and takes out a home equity line of credit, and uses this money to make improvements to their home, then the interest on the line of credit is still deductible up to certain limits. However, if the individual uses this line of credit to go on vacation, pay a child’s college tuition, buy a new car, or put it toward some other non-home-improvement purpose, then the interest on the loan is no longer deductible.

Some individuals might also find this year that they are able to take advantage of the new Qualified Business Income (QBI) 20% deduction, which applies to self-employed individuals as well as owners of pass-through entities. The complexity of this deduction requires a great deal of planning to calculate it on an individual level, and depends on multiple factors including the type of business, the amount of W-2 wages the business may have, the unadjusted basis of property, and the individual’s taxable income, to name a few. Given the intricacy involved, it makes sense to have an accountant help with this determination and required calculations.

As tax situations get more complicated, we expect many more taxpayers will need to extend their returns this year. Partly this is due to the fact that pass-through entities like partnerships and S corporations are subject to several new, very complicated rules, which are causing these kinds of businesses to apply for extensions and delay their tax reporting to individual owners. Subsequently, the owners of these entities will need to request extensions as well.

Additionally, there is still some uncertainty regarding the more complex portions of the new tax law and final guidance as yet to be issued by the IRS. Tax preparers are struggling with the practical application of the more complicated provisions of the law, making it an even more trying time than usual for tax professionals. This impact will undoubtedly trickle down into delays for some individual returns as well.

For some, the new tax law and 1040 format represent the level of simplification they’ve been longing for from the IRS; for others, looks can be deceiving, and the added complexities will be challenging to navigate – and could lead to a higher-than-expected tax bill, as well as a potentially higher-than-usual tax preparation bill!

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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