From our resident CPA and guest blogger today - Chad Elkins:
got a slight lull today from my busy season so I thought I'd share some
insights into how my clients here in the U.S. have been
affected by the Tax Cuts and Jobs Act (a.k.a. tax reform) this tax
season so far. For those who aren't familiar, 2018 was the first year of
major tax law changes here in the U.S. and it's been interesting to say
the least. I've prepared about 150 individual
tax returns and around 50 business (S-Corporation, Partnership) tax
returns so far, and here are some of the winners and losers from my
1) Small Business Owners.
Whether you have a Small Business Corporation (S-Corp), an LLC, or are
just a sole-proprietor (Schedule C), the new tax regulations are a boon.
There is a new 20% deduction for QBI (Qualified Business Income) under
section 199A, which is a bit complicated
but is essentially the net profit you make on your business, among a
few other factors. So if your net profit is $100,000, you can generally
take a $20,000 (20%) deduction ON
all of your other business deductions, resulting in only $80,000 in
taxable income. Many of my business clients are seeing
some great results from this new feature and it should really help
increase small business growth, which is never a bad thing. The media
likes to hype up how large corporations (C-Corps) benefited from their
permanent tax rate decrease (from 35% to 21%) as
a result of the new laws and while I have some mixed feelings about
that, one thing that can't be denied is the net positive it will have
for small business corporations going forward as well.
2) Real Estate Investors.
People who earn real estate (rental) income generally have it
categorized as passive income, meaning it's subject to various
limitations concerning deductions and losses. The new tax regulations
allow real estate investors a "safe harbor" designation that
basically requires 250 hours of work a year on each set of rental real
estate activities for it to qualify for the 20% section 199A QBI
deduction (see above). So many of my clients who are landlords have been
taking advantage of this new clause, resulting
in an extra 20% reduction in rental income just like the business
owners I mentioned above. Also, the work hours required for this safe
harbor designation may be performed by the owner or agent, and logging
of work hours must be maintained but only starting
in 2019 so a number of my clients are seeing some great write-offs for
2018 as a result of this. There is also no limitation for state and
local real estate tax deductions on rental properties, which is very
important (keep reading to find out why).
3) Those With Children in Private Schools.
Parents who have children in private schools can now use 529 plans to
pay for them (up to $10,000 per year). This includes K-12 education
tuition and related educational materials and tutoring, and it's a huge
benefit because it's tax free. These used to be
reserved for college tuition payments, but tax reform allowed many of
my clients to pay for their children's 2018 private school tuition
expenses using 529 distributions, totally tax free. It makes a
difference when you live in a high-cost area with lousy
public schools such as where I am, and I've definitely seen a number of
my clients take advantage of this benefit since the regulations took
effect last year.
1) Salaried (W2) Employees Who Have Unreimbursed Employee Expenses. Prior
to 2018, if you worked for a company and had a lot of out-of-pocket
expenses required for your job you could claim these as deductions on
your tax return. They would first be reported on Form 2106, which would
then flow into Schedule A miscellaneous itemized
deductions (subject to 2% of your adjusted gross income). Tax reform
completely eliminated this and I've had a few clients get absolutely
screwed as a result. It's usually those in sales who have to travel a
ton and pay for gas mileage without any employer
reimbursement who got crushed with this. They used to be able to claim
thousands worth of mileage deductions on Schedule A to help get them
sizable refunds, but now....nothing. Raising the standard deduction to
$12,000 (single)/$24,000 (joint) would seem to
offset this, but....see the next few paragraphs.
2) Married Property Owners in High-Tax States. Tax
Reform now limits state and local tax deductions to $10,000 on Schedule
A (itemized deductions), which means you get royally fucked if you live
in a state like California, New York, or Illinois. I live in one of
these states and so do my clients, and many
of them are feeling the burn from this new regulation.
say in 2017, you had $7,000 in state income taxes withheld/paid from
your W2 and your spouse had another $6,000 in state tax withholding,
and you own a house with total annual real estate taxes of $15,000
(very common where I live). You add this up and it results in $28,000, a
healthy chunk of state and local tax deductions to write off on
Schedule A. Under the new 2018 regulations, this deduction
gets capped at $10,000 and you are now out $18,000 in Schedule A
common retort to this is that the standard deduction was doubled to
$24,000 under the new regulations for married couples (as I mentioned
above), but when you combine high mortgage interest payments (tax
deductible) with all of the above these couples are now getting a raw
deal compared to prior years. In my example here, the married couple
paid mortgage interest of roughly $13,000 so they would
have exceeded the $24,000 standard deduction limit regardless, but now
they have to claim $18,000 less in itemized deductions compared to 2017.
Funny how the Republicans knew this would screw over people in high tax
states. I wonder what those states have
in common with each other.....
3) Those Who Are About To Be Divorce Raped. Some
of you on this forum will undoubtedly already know what I'm talking
about here. Taxpayers who get divorced after 12/31/18 will no longer be
able to deduct alimony payments. That's why there was an uptick of
finalized divorces towards the end of last year -
not only are alimony payments not deductible starting in 2019, but
those who receive alimony still have to claim it as ordinary taxable
income so that side of the equation didn't change at all.
already had a slew of (male) clients come in telling me that they
divorced their spouses since I last saw them, and this regulation
was one of their major reasons why they knocked it out as quickly as
they could once they determined a separation was inevitable. If you are
currently married and foresee a divorce that will involve alimony
payments in your future, Sorry....I don't know what
to tell you. You missed the boat.
other note - many of my clients are getting smaller refunds this year,
and they think it's because the new tax regulations increased
their taxes. This is not usually the case, because in most instances
their employers withheld less in taxes throughout the year (in response
to the new regulations) so their paychecks were subsequently increased
throughout 2018. Keep in mind that your refunds
are only one part of the equation, so don't freak out if you're getting
less back than you did in prior years.
don't believe the CNN/MSNBC/NY Times, etc. hype about taxpayers getting
screwed due to smaller refunds. That's just typical NPC media
hysteria trying to cause an uproar so don't pay any attention to it. As
I outlined above, some people were worse off, but many, many regular
American citizens benefited from the new tax laws and it remains to be
seen what will happen in the future as a result
of these changes.