THAT WAS THE TAX SEASON THAT WAS - PART ONE

And another one gone, and another one gone.  Another one bites the dust.

Another tax filing season that is – my 48^th.

I got through all of the tax season, and I'm here!

The season ended with only 26 GDEs – the same as last year.  Although I actually prepared 16 less sets of returns by season-end than last year.

Once again, thankfully, no auto, computer, equipment, or weather issues.  And no word of any IRS or state refund or processing delays or FUs - so far.

And. also once again, I was truly “locked behind closed doors” for the entire season.  I did not plug my phone in unless I was expecting a specific call, which was rare.  I got spoiled last season and again this year truly enjoyed working through the day – which began between 3 and 4 AM and ended just after 4 PM - without the interruption of the telephone.  I did, of course, constantly check my email accounts, and responded promptly when appropriate.   

Regardless of how long a person has been in “the business” there is always the challenge of changes in tax law resulting from new legislation, often illogical and inequitable and reflective of the ignorance and agendas of those who actually write and pass tax law.

It took a while to get used to the flow of the ridiculous new “postcard 1040” and the accompanying new Schedules 1 through 6 (although I only used 1 -5).  The old Form 1040, which had evolved over decades, was, like Mary Poppins, “practically perfect”, with a logical flow of information.  There was absolutely no reason to change this format.

The idea of a tax return that fits on a postcard is a gimmick – and a gimmick totally lacking in legitimacy and with no basis in reality.  It is very literally impossible to have an individual income tax return that fits on a postcard under our current Tax Code. 

The new 1040 is not a “postcard”.  It is a 2-sided 8½ x 5½ size form.  This is truly stupid.  The new format should be a 1-page 8½ x 11 form.  And the 8½ x 5½ + or – sized Schedules 1 through 6 should be two 8 ½ x 11 forms – one for Schedules 1 and 3, since these Schedules are the most commonly used, and one for Schedules 2, 4, 5, and 6.  Or 1 through 6 on a 2-sided form. 

The new form 1040, in order to fit into the half-page format, condenses some information that, in my opinion, damages the logical flow of information.

As expected, very few of my clients were able to itemize for 2018.  Since almost all live in New Jersey or New York they were substantially affected by the new $10,000 limit on the “SALT” deduction – some losing $10,000 - $20,000 in allowable itemized deductions.  The few clients who could itemize were those with excessive medical expenses, single filers with mortgages, and couples with recent new home purchases.

But, due to the “SALT” deduction cap, 2018 is the last year I will have to claim as taxable income the prior year’s state income tax refunds.  For the few who could itemize the $10,000 limitation did away with any tax benefit from deducting state income taxes.  A related side benefit of the Act – clients deducted the state income tax withheld and paid in 2017 when rates were higher, and claimed the refund received as income in 2018 when rates were lower, for example deducted at 25% and taxed at 22%.  So, the result was they are net “in pocket” the rate differential - in the above example $30 for every $1,000 of state refund.  Not a lot – but better in the taxpayer’s pocket than the government’s.

The tax law change from the GOP Tax Act that had the most potential for agita was the elimination of the itemized deduction for “home equity debt” mortgage interest and the resulting need to correctly separately identify “acquisition debt” interest and “home equity debt” interest.  Actually, it had been important to separately track acquisition and home equity debt prior to the Act, but not as vital due to the $100,000 home equity debt threshold.  As an aside, I do not know of any taxpayer, client or otherwise, who actually did this in the past.

Another aside, while I oppose the $10,000 limit on state and local property taxes and income or sales taxes, I wholeheartedly support limiting the deduction for mortgage interest to acquisition debt interest.

Last year I advised my clients of the importance of keeping separate track of acquisition debt and home equity debt going back to their original purchase mortgage, provided instructions and worksheets on how to do it, and offered to do it for them during the year.  No client contacted me about this issue during 2018, and no client provided me with information on the source of their 1098 interest with their 2018 “stuff”.  They totally ignored this issue.

Luckily most clients were not able to itemize for 2018, so the issue only applied to a handful of returns.  For some, since I keep copies of every return I have ever filed for current clients as well as some back-up documentation, I was able to easily determine or estimate the amount of acquisition debt interest. 

Because of the “pecking order” for applying principal payments I could go back to the first refinance of their original purchase mortgage (if I had the closing statement in the file) and identify the amount of the original mortgage principal that was paid off via that refinance.  If this was $98,000, and the 1/1/18 principal balance of the current mortgage (listed on the Form 1098) was $206,000, after multiple refinances and consolidations over the years, and the fixed rate of the current mortgage was 3.65% I would know that the correct itemized deduction was $3,577 and not the $7,000+ reported on the 1098.  If they had borrowed to make a “substantial improvement” in the past – say $25,000 to remodel the kitchen – the allowable deduction would be higher.

While the inability to itemize did make some returns simpler, it did not substantially reduce the time involved in preparing, checking and compiling most returns

There was a disturbing change this year in the Fidelity year-end consolidated tax statements.  Those sent to taxpayers in the mail did not include detail on the dividends paid.  You had to go online and print-out the statement to get the complete report.   

While all of the consolidated year-end tax statements provide the same basic 1099 information, the supplemental information provided by the brokerage houses in these statements varies.  TIAA-CREF without a doubt has the absolute best supplemental information – with literally all the information needed to properly prepare federal and state tax returns available.  Morgan Stanley does good providing information on exempt income, foreign income and USGO percentages for mutual funds and individual state percentages for municipal bond funds, but I wish they would have sub-totals for each investment’s separate dividend income.  Fidelity provides the least amount of information in their statements, and now even less.

To be continued . . . . . .

TTFN