Friday, December 27, 2019
THE YEAR IN TAXES 2019
2019 was the first year that we prepared tax returns under the multitude of changes enacted by the GOP Tax Act.
As I said in my review of the tax season, regardless of how long a person has been in “the business” there is always the challenge of dealing with 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.
I had been well-educated on the tax law changes during 2018. And last tax season when preparing my clients’ 2017 tax returns, I calculated the tax on their income and deductions using the new tax law and rates of the GOP Tax Act. However, 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 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.
Otherwise the 2019 tax filing season ran smoothly. There were no auto, computer, equipment, or weather issues. The season began, for me as always February 1st, and ended on time, again for me the day before the statutory April 15th filing deadline. I ended the season with only 26 GDEs – the same as last year. Although I actually prepared 16 less sets of returns by season-end than last year.
As expected, very few of my clients were able to itemize on their 2018 Form 1040, due to the increased Standard Deduction and the limitations on and elimination of allowable deductions. Since almost all of my clients 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.
On the NY state income tax returns residents and non-residents were able to itemize using the “old” pre-GOP Tax Act rules, and could itemize on the state return even if they could not on the federal. So, in some instances I still needed information on home equity loans and investment and unreimbursed employee business expenses.
Last year I had 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 last year, and no client provided me with information on the source of their 1098 interest when giving me their 2018 “stuff” this year. They totally ignored this issue. Luckily because most clients were not able to itemize this 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.
This year the Form 1098-T sent to college students by universities was finally no longer the equivalent of tits on a bull. It actually provided the information necessary to calculate the education tax credits – “the total payments received by an eligible educational institution in 2018 from any source for qualified tuition and related expenses less any reimbursements or refunds made during 2018 that relate to those payments received during 2018”. Previously these forms only told us what the college billed, which was totally useless.
The biggest issue of this tax season was the occasionally disastrous results of what I called “the IRS withholding FU”. As I explained to clients in my explanatory memo, last February the IRS revised the federal withholding tables to reflect the reduced tax rates. But they did it too “liberally” – on purpose I believe so it would look like the GOP Tax Act benefited taxpayers more than it really did.
Almost every taxpayer whose 2018 withholding was based on the federal tables – and not a flat amount as with most IRA withdrawals and Social Security benefits – was under-withheld. This was especially disastrous with multiple sources of withholding – like two-income couples, taxpayers with more than one job, and those receiving both pension and W-2 income. I had clients owing $4,000, $9,000 and $20,000 because of the IRS withholding FU.
It was déjà vu all over again. Once again, the idiots in Congress reminded me why I call them “the idiots in Congress” by waited until the very last minute to pass retroactive tax legislation. At the end of December, a temporary retroactive extension of a laundry list of expired tax benefits and special interest loopholes, the now infamous “extenders”, was included in the government funding bill.
Constantly and retroactively temporarily extending specialized tax benefits and loopholes every year or every other year is totally ridiculous. If the idiots in Congress think a tax benefit is appropriate it should be included in permanent tax legislation. But then – they are idiots who do what they are told by lobbyists and Party leadership.
Also included in the funding bill was “The Setting Every Community Up for Retirement Enhancement (aka SECURE) Act of 2019” which made some big changes to retirement savings account rules, most effective beginning with tax year 2020. These changes are, for the most part, actually good and welcomed.
The only other significant tax legislation passed in 2019 was the “Taxpayer First Act”, which dealt with taxpayer protections and identity theft prevention.
In the fall of 2019, the IRS issued a revised Form 1040 and corresponding numbered supplemental schedules for 2019 and created a new 1040-SR for senior citizens, which was mandated by the Bipartisan Budget Act of 2018. The new 1040 is a 2-sided form that is 2/3 of a full 8½ x 11 sheet, instead of a ½ a full sheet like the ridiculous 2018 “postcard” version. The content of the new 1040 and 1040-SR are exactly the same – line for line and word for word. The only difference is that the 1040-SR has substantially bigger print and includes a Standard Deduction Chart. The revised format is clearly much better than the 2018 Form 1040, with a more logical flow of information.
The previous 6 supplemental schedules have been cut to 3 – Schedule 2 and 4 are combined in the 2019 Schedule 2, Schedule 3 and 5 are combined in Schedule 3 for 2019, and the information previously reported on Schedule 6 is now on the 1040. Reporting Schedule D income or loss has been moved from Schedule 1 to a line on the 2019 Form 1040.
And the IRS also issued a new Form W-4 effective for tax year 2020. The major change to this form is that the concept of “withholding exemptions” no longer exists. The new form requires taxpayers to enter a lot more information, and is now a full page instead of just coupon-sized. While it is more involved and perhaps complicated, I believe it is actually “more better” than the old method of calculating withholding considering the changes made by the GOP Tax Act, and fixes “the IRS withholding FU”. I provided my advice on filling out this new W-4 here. Unfortunately, the FU was still in place for 2019 returns to be filed in 2020. I anticipate under-withholding for many clients again on 2019 Form 1040s.
So, fellow tax professionals, as I ask each year - did I miss anything important?
Let me end with the same wish I had at the end of 2017 and 2018. Let us pray that the new year will bring the removal of mentally unstable malignant narcissist Donald T Rump from the White House, either via impeachment or the 2020 election.