Misconceptions about the new tax laws for 2018

[New York Enrolled Agent]

We're 3 weeks into season and I'm curious what everyone's experience is regarding the new tax laws. I use Drake Tax software and we have a handy dandy worksheet that shows the potential impact of the new tax laws and how it will look on the client's 2018 tax return. So far, after writing 300 returns, we've had only ONE client who will see a lower refund next year; the other 299 will see a higher refund. Some will double, a few will triple and a few more will see a quadruple of their refund.

Pay close attention to what Kathy has posted. Most taxpayers will have a lower tax liability - a good number of those taxpayers will also have lower refunds next year. The new withholding tables are giving some of the refund NOW. There will be some unhappy taxpayers next April 15 if you just tell them there refunds will be bigger based on the Drake projection.

[kathyc2]

My software has what amounts to an enhancement to the "what if" scenarios it has always had. The extra is that, from the inherent data file, it "recalculates" the potential 2018 tax using the same income/deductions shown on the 2017 return. Personal exemptions go away, itemized deductions are shown but may become standard deduction, new standard deduction amounts are shown, etc.

Most software has a utility that will more of less calculate 2018 tax liability correctly. The problem comes from assuming 2018 withholding will be the same as 2017. Unless the withholding is lowered on the projection, the anticipated refund number may be significantly too high.

It would be interesting if OP would post specific numbers of a client that she thinks is going to see triple the 2017 refund in 2018.

[abctax]

CYA move for me...

I have added a paragraph to the client instruction letter stating: "watch your withholding in 2018" (summarized version). I then do a handwritten note stating "it looks like your 2018 liability may go up/down approx $$$$. Make sure your withholding doesn't decrease by more than that"

The last part of the paragraph asks "Do ya' wanna HIRE me to look at your withholdings? Call me after tax season if so..."

[kathyc2]

I would have doubts that any of the mid level tax software takes withholding changes into account when they are making 2018 projections.

Take the simplest case; a single person taking standard deduction with no additional income or deductions. Say their salary is 52K a year and they claim S1 on W4. For 2017 their withholding would be 7,151 and tax would be 6,139 for a 1,013 refund.

Using 2018 rates, the tax would be 4,740 and if you use the 2017 withholding of 7,151 it's going to show they will have a refund of 2,411. However, because of withholding changes the amount withheld would be 5,563 if the new tables would have started 1.1.18. Withheld amount of 5,563 less actual tax of 4,740 will give a refund 913.

Preparers telling clients they will receive a larger refund in 2019 due to tax law changes will likely end up with egg on their face.

[ATSMAN]

That Drake Tax Impact report assumes that 2018 income and expenses, including withholding will be exactly the same as 2017. So it is not a projection, but rather what would have been the tax position if the new 2018 laws were in effect for 2017 returns. We all know that income, expenses and withholding will most likely change for 2018 so you have to use the Drake Tax Planner to do any 2018 projection.

In my practice roughly 25% to 35% of the folks filing Sch A will switch to Standard Deduction. I have not done a complete analysis but that is on my #1 project after tax season.

I am currently more concerned about doing 1040-X for those who may benefit from the retroactive extenders. I already have half a dozen taxpayers in line!

[Rapid Robert]

Welcome to the forum, JuneC! Quite a first post you made there.

You titled your thread "Misconceptions". I didn't see any reference to this in your own comments, or the extensive quotes you posted. What "misconceptions" were you talking about?

Since you invited it, I will add two mild comments here: 1) your paid-preparer client base in Wisconsin does not appear to me to be representative of the U.S. population as a whole, so I'm not sure any global conclusions can be drawn from your experience. Surely you are aware that the tax law was designed to give relatively more tax cuts to some states than others, and especially some income levels over others. Do you have any corporate clients, maybe with overseas assets? That was the biggest target of all in the tax law. 2) to the extent people get bigger refunds, it's really just like a payday loan -- a little extra walking-around money for now, and a huge, hidden bill to pay down the road.

[kathyc2]

If you are only looking at refunds, a lot of people will see lower ones on 2018 file 2019 returns.

Although most people will pay less tax, I have found the new withholding tables are more generous than the actual tax cut. I have a projection spreadsheet set up that will calculate the new withholding and also 2018 rates. The majority of people who do not have children under 17 will see lower refunds.

[JuneC]

ETA: My apologies for giving the impression I'm focusing on refunds. And yes, I'm super careful about using the Impact report and how I say things, I explain in detail in one of my replies. I've learned from reading some responses that I need to choose my words more carefully, lol. Hey, it was my first post and I was genuinely curious about how things are going in other offices in other parts of the country. Thanks for all the input everyone!

ETA2: Apparently, when I edited to add the above comment, I deleted the entire original post? Or am I not seeing it? I can't find it. I should stick to doing taxes, LOL.