Thursday, December 13, 2018


My legitimate ongoing concern about the “urban tax myth” that CPAs are automatically 1040 tax exports by virtue of their initials (they are most certainly NOT) doesn’t mean that online CPA-related sources do not provide excellent and timely information and commentary on 1040 issues.

Case in point “Tax Reform Myths and Facts for 2019: What the TCJA Really Means for Taxpayers” by Dave Duval, EA (you will note that he is an EA and not a CPA) at CPA PRACTICE ADVISOR.

Dave makes some excellent points in his piece, beginning with – “As tax practitioners, we wear many hats: tax aficionado, document sorter, government form translator, timekeeper, empathetic ear, and counselor.”

The article deals with the “plethora of information (and more pointedly, misinformation) about the Tax Cuts and Jobs Act of 2017” that is out there.  

Here are some of the good “take-aways” from Dave’s discussion (highlights are mine) –

* State Income Taxes: “Depending on the state, there may be full conformity {with the GOP Tax Act} or none at all. For example, in California taxpayers will still be able to deduct unreimbursed employee business expenses that are over 2% of their federal adjusted gross income. It will be crucial communicating to our clients that states may or may not have conformed to the federal changes, and it is still important to continue to retain documentation on certain deductions that may have been eliminated at the federal level but still apply at the state level. Retaining the documentation may result in lower state taxes, thereby easing the sting of losing the deductions on the federal return.”

NJ residents can still deduct out of pocket medical expenses, including some expenses that may be “pre-tax” for federal tax purposes but not for NJ state taxes, in excess of 2% of NJ Gross Income whether or not they itemize on the federal return.  And PA residents are able to deduct most employee business expenses without any income limitation.

* Alimony: The changes to the rules for reporting and deducting alimony “is only true for divorce or separation instruments executed on or after January 1, 2019. Alimony that is paid pursuant to a divorce or separation agreement executed before January 1, 2019, will still adhere to the alimony rules in place before TCJA. Divorce or separation agreements that were in place before January 1, 2019, and are modified after December 31, 2018, will still follow the old alimony rules unless the modified agreement specifically states it now follows the new rules.”

* Home Equity Interest: “As tax practitioners, we may need to spend more time with our homeowner clients discussing the difference between acquisition and equity loans, and performing interest tracking on how the proceeds were used. Additionally, we may need to request additional paperwork from our clients, such as the loan documents, and hope they recall where they spent the money.”

It is the responsibility of the taxpayer, and not the tax preparer, to separately track acquisition debt and home equity debt.  The importance of doing this cannot be stressed strongly enough.  Taxpayers should begin to work on this task NOW.  Check out my “Mortgage Interest Guide”. 

* Section 199a Deduction: “Many small business taxpayers are anticipating a big tax break this year due to the new 20% qualified business income deduction. Those small businesses that are organized as C corporations may be wanting to switch to a sole proprietorship or S corporation in order to take advantage of the deduction as fast as possible. Hopefully, these taxpayers will be contacting us first and not an online legal site where they can make the switch themselves {very, very important – consult your tax professional before you do anything regarding a change of business entity – rdf}. Many small business owners are not aware of the limitations and complexities to this deduction. Furthermore, there may have been very important reasons why a business formed as a C corporation that goes beyond taxes. By switching entities, these reasons may fall by the wayside.”

The Section 199a deduction is ridiculous, and ridiculously complicated, and unnecessary.  More proof that the members of Congress are idiots.

* The New “Postcard” 1040: “Some taxpayers will be lulled into a false sense that this means taxes are now simpler, and therefore the fee to prepare the return will be lower. As we know, expensive things can come in small packages. With all the changes courtesy of TCJA and state nonconformity, this tax season may be one of the most complicated we have seen. As such, we will need to educate our clients on this and caution them that the preparation fee may be larger this year.”

The “postcard” 1040 is perhaps the stupidest idea I have seen in over 45 years of preparing tax returns. 

Dave’s bottom line truly tells it like it is –

One thing is for certain about the upcoming tax season − just about every tax return is going to take extra time and care.”

Thanks to Dave for an excellent discussion that should be read by all taxpayers and tax preparers (not just CPAs).


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