Atlanta Financial Newsroom

Minimizing Surprises at Tax Filing Time

Julianne F. Andrews, MBA, CFP®, AIF®
March 11, 2019

When Congress passed the recent $1.5 trillion tax bill (The Tax Cuts and Jobs Act or TCJA), it triggered the first comprehensive revamp of the U.S. tax code in more than three decades. As we prepare to file our 2018 tax returns, Americans will feel the effects of this legislation for the first time. For most, the effects will be positive. In fact, 80% of Americans will see their taxes drop. However, not all the news is good. There will be inevitable surprises as 2018 taxes are filed with one particularly nasty “gotcha” that will likely catch many taxpayers off guard.

Despite the government shutdown earlier this year, the IRS has said it will process refunds on time and it called 46,000 of its furloughed employees back before the shutdown officially ended. While this commitment was encouraging, close to 43% of the agency’s workforce remained sidelined until January 25 when the shutdown officially ended. Even though the IRS is now fully staffed and up and running, there is a large backlog of work that built up during the 35-day shutdown — the longest in our nation’s history.

Taxpayers who received refunds in previous years are the ones most likely to get caught by that nasty “gotcha”. The IRS adjusted its tax withholding tables based on the premise that most working Americans should see their paychecks increase after the tax overhaul. However, the adjusted withholding tables did not align with the tax cut. As a result, employees who did not carefully review their withholding and make appropriate adjustments, if needed, could find themselves owing taxes, not receiving refunds.
All of these changes prompted the IRS to waive penalties for taxpayers whose underpayment is less than 15% of their tax bills for tax year 2018. However, we do not expect this more lenient approach to continue, making it imperative to review your withholding with your tax professional and make needed adjustments for tax year 2019 as early as possible in the year.

Special alert for small business owners

Small business owners will be facing a more restrictive approach to the pass-through deduction than originally anticipated as a result of the tax law changes. Unfortunately, it was not until January 18 of this year that the IRS clarified the pass-through deduction eligibility for Sub S corporations, sole proprietorships and partnerships with a 200-page explanation of qualification guidelines. As expected, the eligibility guidelines were fairly restrictive and not nearly as sweeping as many originally had hoped.

Not only do small business owners have to manage their way through the restrictive eligibility scenarios, but in addition, some of them will find that language mistakes in the tax bill will take a financial toll as well. For example, clients owning restaurants and hotels will find that language errors in the new tax bill will force them to amortize their renovation costs over several decades rather than taking the immediate write-off previously allowed. It is unclear whether or not these errors will be amended in future legislation.

Summary of major tax changes

In previous articles and blog posts, we have reviewed the tax overhaul’s major changes, which affect the treatment of standard deductions, personal exemptions, child tax credit and elder care, medical expenses, mortgage interest deductions, and state and local taxes. This high-level summary recaps those main points:

  • Standard Deduction

Fewer taxpayers will elect to itemize deductions as the standard deductions have increased to $12,000 for individual filers and $24,000 for joint returns. Taxpayers who make charitable donations need to pay attention to this revision. Unless other itemized deductions put you over the standard deduction threshold or charitable gifts are grouped into a single year instead of made over multiple years, this change will minimize the tax advantages previously associated with charitable giving. College students and their parents, however, need not worry because this change does not affect the allowed $2,500 student loan interest deduction.

  • Personal exemption

The pre-tax personal exemption of $4,050 for the taxpayer, spouse and each dependent, which previously lowered taxable income, is gone as well. Middle- and lower-income families will likely be adversely affected by this revision.

  • Child tax credit & elder care

The new law doubles the child tax credit to $2,000 per child, while raising the income cap to $400,000 for married couples filing jointly. Taxpayers caring for elderly parents can claim a $500 credit for non-child dependents as well.

  • Medical expenses

For 2018, you can deduct medical expenses that equal or exceed 7.5% of your adjusted gross income. However, beginning in 2019, that threshold has increased to 10%. Be aware that you need to itemize your deductions to take this deduction.

  • Mortgage interest deduction

Homeowners with new mortgages can deduct only the interest paid on the first $750,000 of the home’s value, down from $1 million. Existing mortgages are grandfathered, however. Interest paid on home equity lines of credit are no longer deductible unless the funds were used to “buy, build or substantially improve” the home that secures the loan.

  • Treatment of state & local taxes

The deduction for state and local income taxes (including property taxes) is now capped at $10,000 under the new rules. However, this deduction is available only to taxpayers itemizing their deductions.

Monitor withholding closely in 2019

Finally, if you thought the TCJA’s effects would be over when you filed your 2018 return, think again. According to the General Accounting Office, taxpayers will need to closely monitor their withholding status throughout the 2019 calendar year. Keeping your withholding aligned with your actual income will go a long way towards keeping you out of the group of 32 million taxpayers who are expected to owe taxes in 2019. That figure, which is based on a taxpayer universe of 150 million, is 21% higher than in previous years.
As you sort through these new rules, contact your Atlanta Financial team to determine your best course of action for 2019. We are always happy to answer your questions and to coordinate with your tax professional.

Share This:

Share on facebook
Facebook
Share on linkedin
LinkedIn
Share on twitter
Twitter
Share on google
Google+

CAN Money Buy Happiness?

For most of our lives many of us have heard the old adage “Money can’t buy happiness.” And we can all think of numerous examples of individuals where this certainly seems to be true – whether among the powerful and famous, or within our own family or group of friends. But is that really true? Research over the last few decades suggests “NO!” In fact, many studies show that in one sense money can buy happiness. But it’s not the amount of money we have, but rather how we SPEND our money that can indeed increase our happiness – although perhaps not in the way Madison Avenue or Amazon Prime would like us to think. First, let’s address the skeptics among you who feel sure that if you simply had MORE money you would indeed be happier. Statistics show that certainly isn’t true, since 70% of all lottery winners or those with a sudden financial windfall end up bankrupt within a few years.1 Carl Jung, famous psychologist, said in fact that the keys to happiness were five things.

Read More »

The New Tax Bill: Tallying the Results

“How did the new tax bill affect me?” was the question on everyone’s minds this tax season, and for good reason. Even though this was touted as the greatest simplification of the tax code in my lifetime, I didn’t notice any reduction in time spent preparing returns. Those of you who reviewed your returns in detail noticed that the schedules look drastically different although contain all the same information. The short answer for many is that it didn’t materially change your overall tax liability. The outliers fell into one of a few buckets…

Read More »

So, You Just Received a Financial Windfall

What would you do if you received a major financial windfall? Would you buy a new house or vacation home, give some to your family members, donate to your favorite charity, or take the trip(s) that you have always dreamed about?While most people will not receive a major financial windfall during their lives, it is not uncommon. You might receive a financial windfall by:

Read More »

To Roll, or Not to Roll?

When I first sit down with prospective new clients to learn about their finances, one of the most common issues we come across is how spread out investment accounts are.  We may have a brokerage account here, an IRA there and, very often, an old 401(K) or two still sitting in a previous employer’s plan.  There are plenty of reasons why a 401(K) may be left behind with a prior employer – it could have gotten lost in the shuffle of beginning a new job, it may have just seemed like too much of a hassle to move the plan, or perhaps you took the time to roll the plan into an IRA but your employer made subsequent contributions you didn’t know about.  These accounts, affectionately referred to as “orphans,” are becoming more and more common given the increasing frequency of job-hopping, especially among Millennials.  So, who do these orphan accounts belong to and more importantly, what can be done about them? 

Read More »

Yearly Archive

Author Archive