Preliminary Report on Estimated Tax Savings with the New Tax Law

The Wealthy Accountant is giving over $1,000 in cash away to subscribers. Don't miss out! Subscribe today. Check the Where Am I page for drawing dates.

Tax season is still early in the tooth but patterns are starting to emerge.

My software allows me to use current year data to estimate results based on the Tax Cuts and Jobs Act changes. With a couple hundred returns under the belt already the impact of the changes are mostly expected with a few surprises thrown in.

Since planning will be so important this year I wanted to share my findings. Please understand these are estimated results. Several factors are hard to nail down in these estimates as the accounting industry is still deciding how to handle certain issues and the IRS still has to write regulations interpreting the changes.

One of the biggest issues not accounted for is the business income deduction as it is adjusted for guaranteed payments to partners and reasonable compensation to S corporation owners. If you aren’t familiar with these terms you can still benefit from my early findings.




Expected Results

Some results were expected. High income taxpayers are doing rather well with the new rules. My original thought was the biggest benefits would go to those well up the tax bracket ladder.

That has been the case, but significant tax reductions are being felt by those down to $100,000 of income and even lower!

My reading of the tax bill led me to believe lower income taxpayers wouldn’t benefit much. Eliminating personal exemptions while increasing the standard deduction was mostly a wash on the surface as the amounts generally offset.

The child tax credit enhancements are helping families with children. In the end, families in the upper middle class are doing well based on estimates.




Unexpected Results

The reason for this post is the unexpected results. Common knowledge on how the tax changes will affect taxpayers has been written about ad nauseam. There are plenty of surprises I do want to share.

As the first tax returns came in it started to look like the majority of clients would see nickels and dimes to their tax savings or additional tax next year. These early clients also tend to have very simple returns with lower income (at least for my client list).

My team and I review the expected changes with every client. We quickly discovered the tax savings frequently crawled lower down the income ladder. I personally find this a pleasant surprise. If a tax cut is going to work you need to give the break to those who will spend it. People like me only add it to the investment heap without helping the nation’s economy much.

Eliminating personal exemptions and replacing it with a higher standard deduction didn’t hurt as much as feared, especially if children are involved. Households without children are seeing minor changes unless their income is higher where they benefit from the lower tax brackets and longer time spent in lower brackets.

Retired clients were expected to see modest adjustments. However, because many retired persons can control their income stream somewhat due to timing of withdrawals from retirement accounts, they can react to the changes and plan for an overall lower tax liability.

The most unexpected result was the percentage of clients who will see a tax reduction. My client base is not a typical cross-section of the country. Low income taxpayers generally seek a different type of tax professional.

Of those facing a higher tax liability the numbers can be large. Most tax increases are nominal, but a few are significant. The worst part is I can’t tell you what to look out for. It always involves something unusual that affects the return negatively. All I can do is encourage a consultation with a tax professional after tax season. My guess is most taxpayers will find more value in a consulting session than they have for many years.

Two expected changes that turned unexpected are having a serious effect. Miscellaneous deductions on Schedule A, subject to 2% no longer apply in 2018 and after. These deductions had no affect for most taxpayers since the deductions in this category had to exceed 2% of adjusted gross income before it counted.

As a good accountant I studiously entered the information from clients even if I knew it wouldn’t count so they could see I didn’t miss it.

The things in the “subject to 2%” area of Schedule A include tax preparation fees, safe deposit box, union dues and specialty work clothes (uniform, safety glasses, steel tipped boots, et cetera). Most of these items are small enough not to change the amount itemized.

Certain education expenses fall into this category, too, along with certain legal fees from protecting or increasing taxable income.

But the biggest losers involve unreimbursed employee business expenses. Sales people top the list. I also have a rock band where equipment and travel not reimbursed by the band are no longer deductible.

Miles add up fast for traveling sales people. When I say traveling it usually involves local clients. Distant travel is more likely to be reimbursed by an employer.

There are a few planning tips. First, it’s best if the employer reimburses expenses. They’re not reported by the taxpayer receiving the reimbursement and deductible by the employer.

For the rock band and a few other clients I might recommend changing from an S corporation to a partnership. Before making this change it is vital to have your tax situation reviewed by a competent tax professional.

The reason for my recommendation to change to a partnership is that unreimbursed partnership expenses are fully deductible on page two of Schedule E and listed as UPE. The downside is the possibility of higher self-employment taxes.

The final Schedule A issue relates to the limitation on the so-called SALT (state and local taxes) deduction. In 2018 and after the SALT deductions are limited to $10,000. Most people assumed this only affected high income taxpayers from high tax states. Think again.

I have several clients from low tax states facing the cap. One Texas client saw a reduced estimated deduction because real estate and sales taxes pushed him above $10,000. And Texas doesn’t have an income tax!




Cautions

The more returns my office prepares the more I’m convinced clients will need to sit with me this summer and plan. You, kind readers, need to do the same.

I’m setting some appointments already. Due to the demands tax professionals will face this summer I recommend setting an appointment early. My office will accept consulting sessions from the beginning of May until the end of December. (The two weeks after the due date are for “me” time.)

One more thing before you prepare for the weekend.

There is a lot of confusion about the ACA (Obamacare) penalty for not having health insurance. The penalty applies for the current 2017 tax return being filed AND the 2018 return. The healthcare coverage penalty disappears in 2019!

My advice is plan. Of all years, this will be the one that gives you more bang for the buck than you’ve enjoyed for a long time.

Now go and have some fun. See y’all tomorrow for Stalking the Accountant.



Keith Taxguy

4 Comments

  1. Jim on February 9, 2018 at 10:41 am

    Glad to see you admitted you were wrong from your article a few weeks ago where you destroyed the new tax legislation. I think every one of these financial blogs should have a disclaimer at the top stating “I am conservative” or “I am liberal” as your political views definitely skew your understanding and interpretation of our current financial system. This would give the reader the ability to be more objective when reading these posts. I’ve been reading your posts for a year now and although it’s easy to see your views are liberal, at least you are one of the few that can admit you were wrong, which is the only reason I still follow your posts.

    • yz on February 9, 2018 at 1:39 pm

      Jim,

      You obviously didn’t read those few posts where Keith addressed his political views pretty clearly.

      Regardless, when you’re looking for tax/financial adviser, or any other professional for that matter, you shouldn’t limit yourself by basing your choice on their political views. If you know you could benefit from somebody’s advice but they don’t share your political views, are you really gonna walk away? We’re in America, we’re lucky enough not to have dictators that steal children to form their children-armies. We don’t live in Hitler’s Germany either. We have two main parties that are not that evil, and there are decent people on both sides, and there are idiot people on both sides. Look for the decent ones.

  2. FullTimeFinance on February 10, 2018 at 10:19 am

    The change I’m still trying to figure out is the deductions for small business pass through income in relation to a solo 401k. I would assume 18.5 elective contribution has no impact on business income for the purpose of the deduction but the employer contribution would. Obviously the elective would impact the taxable income of which it has to be the lower, but for those of us married people splitting income between w2 and self employed that’s less of a concern.

    Other results don’t surprise me

    • Keith Schroeder on February 10, 2018 at 11:32 am

      FTF, there is some concern in this area. The business income deduction is supposed to be calculated without reasonable compensation to owners included. I think this will apply to the wage formula for those over the cap so all wages will reduce profits and the business income deduction. Withholding from your paycheck for retirement accounts will have no effect; the matching will reduce the corporate profits passing through as matching is a deduction to the firm.

Leave a Comment





%d bloggers like this: