Five lessons from the 2018 US tax season
When US taxpayers filed their 2018 tax returns, it was the first time they dealt with significant tax reform in more than 30 years. The Tax Cut and Jobs Act became law in 2017 and overhauled much of how individuals and businesses are taxed. Understanding how the law would impact our clients and implementing the law on tax returns brought challenges. In this article we discuss our top five learning points.
Tax withholding tables
Last January, the IRS adjusted the federal tax withholding tables to reflect the reduced tax rates applying in 2018. As a result, many employees enjoyed higher pay cheques because of reduced federal tax withholding. But there was a problem: the tables failed to consider other changes in the law, including the loss of tax deductions by those on higher incomes. Many paid insufficient tax and faced unexpected and significant tax bills.
If you want to avoid an unexpected tax bill, work closely with your adviser to ensure you minimise taxes and determine your appropriate federal tax withholding rate.
Qualified Business Income (QBI)
The 20% deduction for Qualified Business Income (QBI) was one of this year’s most discussed topics. It was not until the summer of 2018 that we received more clarity on specified-service businesses. However, the law is still uncertain, and we hope for further guidance. That said, many of our clients took advantage of the new deduction and the advance planning surrounding maximising the QBI was effective.
On the flip side, we saw a significant delay in tax reporting from partnerships and S corporations that hold businesses that may generate QBI. Hedge funds will face extremely challenging reporting requirements for the QBI. We expect that some K1s, reporting shareholder and partner income, will arrive even later in the summer of 2019.
Decrease in individuals claiming itemised deductions
For the 2018 tax year, the standard deduction increased to $12,000 for single filers and $24,000 for married filers filing jointly. Given the $10,000 limit on the income and real estate deduction, as well as the elimination of miscellaneous itemised deductions, many taxpayers’ standard deduction was higher than allowable itemised deductions. Taxpayers finding themselves in this situation would likely anticipate that the standard deduction might be more beneficial in the short term. Those taxpayers should consider steps to plan controllable tax deductions better to maximise the benefit of the deduction.
Increase in notices
Our clients are now receiving tax notices from both the IRS and the Illinois Department of Revenue, our local state tax agency. Our advice is don’t panic. Most of these notices are showing disallowed deductions or credits, but that doesn’t mean the notice is correct; the revenue agencies are simply asking for more information. If you receive such a notice, send it to your tax adviser who will be able to provide the necessary information to support your tax position and rectify an apparent underpayment.
Theft identity protection PIN
Sadly, fraud and scams are on the increase, and tax returns are no exception. As an added protection, the IRS has assigned a six-digit Identity Protection (IP) PIN to affected taxpayers to help prevent the misuse of Social Security Numbers on fraudulent federal income tax returns. Taxpayers with a PIN must use it on their tax returns for the IRS to accept the tax filing.
While it’s easy to relax at the end of another tax season, it’s important to keep learning and prepare for next year.
About the author
Karen Snodgrass is a principal at Russell Bedford’s Chicago member firm Cray, Kaiser Ltd. She oversees CK’s tax division, with niche expertise in closely held and family-owned businesses. In her tax planning work, she minimizes liability at the entity and individual level by helping clients think through the tax implications of their decisions throughout the year. Having successfully navigated evolving tax codes for more than 20 years, Karen leads seminars on tax law updates at the firm. firstname.lastname@example.org