Ask any accountant or tax expert and they’ll tell you this past tax season was among the worst they can remember. Thanks to the 2017 tax law combined with the longest-ever government shutdown, which delayed guidance being sent out on the new rules and regulations, the season kept everyone on their toes.
“The tax rules changed completely,” says Kurt Heling of Alberts & Heling, CPAs, which has offices in Green Bay and Neenah. “In basketball, it’s like a basketball hoop going from 10 to 12 feet tall. It’s a whole new world.”
Accountants weren’t the only ones flustered. Many taxpayers also were surprised to learn their refund had shrunk and deductions they were used to taking didn’t count.
But now that everyone has been through the initial season with the new laws in place, advisers say now is the time to plan ahead to prevent surprises on their 2019 returns. According to the Internal Revenue Service, the average refund in the 2019 tax season was $2,833, compared to $3,186 in the 2018 tax season.
For the most part, the smaller refunds resulted from the IRS redoing its withholding rates, which meant workers brought home slightly more money in each paycheck. Heling says observant workers may have noticed, but most probably missed it.
“If you’re withholding less, you’re going to get back a smaller refund because you’re not putting that extra money aside and sending it off to Uncle Sam,” Heling says.
Heling says if clients are worried about how much they are withholding, he can work with them to make sure it’s a number that makes sense. “It’s a delicate game. You don’t want to withhold too much and get a giant refund since that means the government just held your money for you for months, but you also don’t want to under-withhold and not be putting aside enough money.”
The law’s biggest changes — adjusting the number of tax brackets and raising the standard deduction to $24,000 for a married couple — affected taxpayers across the board, Heling says. The higher standard deduction meant itemizing no longer made sense for many things people were used to doing. Being able to deduct charitable giving from their overall income, for example, went away.
That led to some surprises when clients received their completed 1040s, says Ryan Laughlin, a partner at Wipfli in Green Bay.
“While the standard deduction increased, we still want our clients to itemize for their state returns since real estate taxes and mortgage interest can still be used as deductions on the state tax form,” he says. “With the federal changes, it doesn’t mean as much when you pay your real estate taxes, but on a state level, it definitely does. People need to remember that.”
Another surprise: Children over age 17 are not eligible for the standard tax credit. Instead, parents receive a smaller dependent credit and lose a personal exemption.
Charitable donations can be itemized on state returns.
“I’ve been doing a lot of education and sitting with my clients looking at their 2017 and 2018 returns side-by-side,” Heling says. “I’ll have clients say, ‘We didn’t change a thing, why did our taxes change?’ and I respond, ‘the IRS is the one that made the changes.’”
One piece of tax advice Laughlin is giving clients is to convert their traditional IRAs to Roth IRAs since “taxes are low right now, so it’s a good time to make that conversion since you can remove funds from a Roth IRA tax-free.”
He also points out that any changes in Washington — such as a new president or Congress falling under the control of one party — may lead to higher tax rates, so it makes a lot of sense to do the conversion now that tax rates are so low.
The days of people donating to a nonprofit in December so they can be in a better tax position are over, Laughlin says.
“Giving a charitable gift so you can claim a deduction on your income — just doing that does nothing,” he says. “There are steps, however, that people can take to benefit nonprofits and help their taxes.”
One idea that has gained traction with Laughlin’s clients is creating a donor-advised fund at one of the area’s community foundations. They can make a $25,000 gift, for example, to create a donor-advised fund and then over a period of five years give out $5,000 a year from the fund to different charities.
“The person gains the tax benefit in that first year with the $25,000 gift. For the right client, this is a good vehicle, especially if they have a good idea of how much they want to donate annually,” he says. “It can only be done once every five years.”
Donating something other than cash, such as real estate or stocks, to the donor-advised fund is another smart tax move, Laughlin says.
“Donate that property to the donor-advised fund and you don’t need to worry about capital gains, and you get assets in that fund to make donations from,” he says.
For clients over the age of 70-and-a-half, Heling says one idea is to take their required IRA distribution and have it go directly to a charity. “It’s a win-win. A nonprofit receives the donation and the person doesn’t have to pay taxes on the additional income,” he says.
Changes for businesses
The 2017 tax law also included several changes for corporate and business returns. One of the biggest changes is how meal and entertainment expenses are tracked. Taxpayers can deduct up to 50 percent of the cost of business meals if the owner or an employee is present at the meal. If entertainment is involved, the meal costs must be separated out, and only those can be deducted, Heling says.
“There’s a lot more recordkeeping that needs to go on now,” he says. “For example, if you’re consuming food and beverages during an entertainment event, that is deductible, but you’ll need to have a separate receipt or invoice instead of placing it all together on one — the tickets and food. Some rules may change or be further defined by the IRS, so keep good documentation.”
There’s also a new qualified business income deduction on the books for businesses. The deduction has two parts: Taxpayers can deduct up to 20 percent of their qualified business income from a domestic business, and eligible taxpayers may be entitled to deduct 20 percent of their combined real estate investment trust dividends and income from a qualified publicly traded partnership. The sum of the two amounts is called the combined qualified business income.
“It’s going to be a new balancing act for business owners between owner compensation and qualified business income,” Heling says.