“How will the new tax law affect me?”
Tax preparers say that is the No. 1 question they are being asked this season — not the usual “How much do I owe?” or “Will I get a refund?”
There is no simple answer because so many factors go into how the law will affect an individual. Tax preparers start with a 2017 return and go through it carefully. Fortunately, there is software for that.
Julie Welch, director of tax services for Meara Welch Browne, P.C., in Leawood, Kan., says she uses two programs depending on the complexity of a client’s return.
For do-it-yourself filers, TurboTax includes a What-If Worksheet, and both H&R Block and TaxAct offer some tax planning.
Ms. Welch, a certified public accountant, pointed out that many taxpayers will be affected not only by the law that Congress passed and President Trump signed at the end of last year but also by state laws, which often use federal adjusted gross income or taxable income as the starting point. Her firm is just inside the Kansas state line from Missouri, and many clients live in one state but work in the other, so they must file returns for both states.
Many people in the New York, New Jersey and Connecticut area have similar complications. Sidney Kess, a C.P.A. and lawyer in New York who is a special consultant to the accounting firm Citrin Cooperman, recently conducted a workshop on the impact of the new tax act for the New York State Society of Certified Public Accountants. He and other tax professionals had these tips:
Get your tax information organized, both your own records for itemized deductions like state and local taxes, mortgage interest paid, unreimbursed medical expenses and charitable donations, and documents like a W-2 from your employer and Forms 1099 or K-1 from banks, brokerage houses, partnerships or trusts.
People who worked as independent contractors should also receive Forms 1099 from those who paid them.
The sooner you have all that together, the sooner you or a professional can prepare your 2017 return and project the impact for the 2018 return you will have to file next year. Greg Rosica, a Tampa-based tax partner in EY, formerly Ernst & Young, and a member of the editorial board for the EY Tax Guide 2018, which is published by John Wiley & Sons, said it was always a good idea to project your tax outlook for the next year, but said it was “more critical than ever this year.”
If you receive a paycheck, check to see how much tax is being withheld. New withholding guidelines take effect this month, giving taxpayers an increase in their take-home pay. For most people, 2018 taxes are expected be less than those for 2017.
That is because marginal rates have been trimmed, and many people will no longer need to itemize deductions. The standard deduction, $6,350 for a single taxpayer in 2017 and $12,700 for a married couple filing jointly, will rise in 2018 to $12,000 for singles and $24,000 for couples filing jointly.
But plenty of people will owe higher taxes for 2018.
Triggers for higher taxes include:
■ Itemized deductions for high state and local taxes, which will be limited to $10,000 in 2018;
■ Complex financial situations like owning a business,
■ A large number of personal exemptions.
For people with adjusted gross income of $156,900 or less in 2017, each personal exemption reduces taxable income by $4,050 — that’s $20,200 for a family of four. But personal exemptions will be eliminated for 2018 returns.
The new rules open up an opportunity for an older child who lives at home and works part time, perhaps to help pay college costs. The student can file her own return and owe no taxes on up to $12,000 in earnings by claiming the standard deduction. The parents would no longer lose a dependency exemption because those exemptions would no longer exist.
Julian Block, a tax lawyer in Larchmont, N.Y., said that if you realize that you face higher taxes for 2018, fill out a new Form W-4 with your employer to increase withholding. You may also need to pay estimated taxes for 2018. The first quarterly payment is due on April 17, as are 2017 tax returns. The goal is to avoid a penalty for underpayment of estimated taxes. “If enough is withheld in 2018 to equal your 2017 liability, you can sleep at night,” he said.
“You want to wind up owing a small balance,” he added. One reason is to avoid being a victim of identity thieves who file fraudulent returns and claim big refunds, which they pocket. If that happened and you really were owed a refund, it could take quite a while to get it.
Barbara Weltman, a tax lawyer in Vero Beach, Fla., said that under the new rules for 2018, employees can no longer deduct unreimbursed business expenses like business use of a car or a home office. She said it would be helpful if employees could get their employers to reimburse these costs through an accountable plan, which makes reimbursements tax free.
Deductions for unreimbursed casualty and theft losses, now eligible when they are at least 10 percent of adjusted gross income plus $100 for each occurrence, are being eliminated beginning in 2018, with an exception: when disasters occur during officially — and presidentially — declared natural disasters like hurricanes or floods. She said people should be sure they have adequate insurance in case of events like home fires or thefts of valuables like jewelry.
If an employer transfers an employee and reimburses moving expenses, that reimbursement will now be taxable income, she said. Ms. Weltman is the author of two J. K. Lasser books, “1001 Deductions & Tax Breaks 2018” and “Small Business Taxes 2018,” published by Wiley.
Not all the new rules take effect this year, she added. And some of these delayed changes are complex.
For example, people who pay alimony are allowed to deduct what they pay, and recipients must report it as income, but those rules are to change in 2019. At that point, for those with divorce decrees and separation agreements entered into — or substantially changed — after 2018, the payments would no longer be deductible and the money received would not be taxable. That could mean problems for people with prenuptial agreements who divorce in 2019. She advised them to consult a tax lawyer.
Mr. Block pointed out another tightening and a tip for coping with it. Tax preparation fees or the cost of tax books or software can no longer be taken as a miscellaneous itemized deduction on Schedule A for the 2018 tax year, he said.
However, if part of the fee is for preparing Schedule C for self-employment income, Schedule E for rents and royalties or Schedule F for farm income, ask your preparer to break out that part of the fee, he said. It will still be deductible.
Mr. Kess cited two ways the I.R.S. can be tougher than it has in the past to collect what it is owed. Passports can be revoked, he said, for taxpayers who are “seriously delinquent,” that is, who owe more than $50,000 in taxes, penalties and interest. In addition, the I.R.S. can now hire private contractors to collect what is owed.
Many charities say donors are cutting back on contributions. Some taxpayers think that if they will now be taking a standard deduction, albeit a larger one, there is no tax incentive to give. Others are hesitant to make long-term commitments because they are unsure of what Washington will do next.
In speaking with donors, nonprofits need to emphasize the importance of the gift to a cause in which the donor believes, rather than the tax consequences, said James J. Vincequerra, a partner in the New York office of Alston & Bird, an international law firm that advises the New York City Opera and other nonprofits.
If you make a mistake or do not have a necessary document, do not hesitate to file an amended return, a Form 1040X, Mr. Rossica said. It is a fairly simple process and does not invite trouble as some taxpayers may fear.
If you are trying to get a late document — Forms K-1, used by partnerships, are often very late — file Form 4868, which is only one-third of a page, for an automatic six-month extension to file your return until Oct. 15, 2018, he said.
But be warned, an extension to file is not an extension to pay. Estimate your 2017 taxes, and if you owe money, pay it. If you are short, you will have to pay the difference plus interest.