Misconceptions about the new tax laws for 2018

[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.

[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.

[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.

[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!

[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.

[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]

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.

[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.

[geekgirldany]

I am not including the Tax Impact Worksheet from Drake. It gives people a false perception of what their refund will be in 2018. They will not look that the tax liability will be lower... the look at the end result which majority of the time shows them getting a larger refund. I explain as other discussed I just don't mention "larger refund" just that their taxes will potentially be lower.

[ATSMAN]

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.

You are absolutely correct. Focusing on refunds will land you in trouble. I always emphasize that the total tax may be lower if the assumptions hold out but their actual refund is a function of how much was withheld. I actually use a highlighter and ONLY highlight the total tax amount!

Unfortunately in our business we have focused too heavily on the "Refunds" ignoring what contributes to a refund!

[geekgirldany]

As a side issue: What is everyone doing, if they are asked, to come up with an answer for STATE 2018 income taxes? One would think the federal tax changes could, under the right circumstances, have some meaningful impact on the non-federal income taxes. (I doubt if any affordable tax software cranks out a projected 2018 state summary!)

FE

I am telling clients that itemize the Federal tax maybe lower but because you more than likely can not itemize the state tax will be higher. I am nearly thinking it might offset the refund on Federal.

[JuneC]

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.

Hello! You're correct, I didn't explain what I meant by 'misconceptions.' I was referring to the misconceptions some of my clients seem to have. Some have expressed fear that they would be owing large amounts of tax. Others have expressed fear that the government is going to 'screw them out of their hard earned money.' And I had one young lady so nervous she was shaking her legs and frantically biting her nails. When I asked her if she was nervous about having her taxes done, she replied, "Yes, I'm beyond nervous. I'm scared. My mother told me I'm going to owe lots of money this year thanks to the dingleberry [other unkind words here] POTUS.' And of course, the folks who have already seen lower withholding from their paychecks are very unsettled that they're going to be 'covered' at tax time with such a decrease in withholding.

No, no corporate clients; I prepare strictly individual tax returns. And yes, I realize it's different in different states, which leads to why I'm curious as to how things are looking for tax pros in other states.

[JuneC]

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!

Yes, exactly. The Impact report is just a tool I use to help them understand that 'based on this year's numbers, things will stay about the same, they may change for the better, but it's likely they won't get worse for your tax picture.' I'm also very careful to explain that the key word with this report is 'Potential' and that they must keep in mind that things could look very different a year from now. And for those interested, we use the 2018 Planner to do an actual projection. Those are the visits I enjoy; the ones with folks who know their 2018 numbers and want to see how they can be prepared for next tax season. Planning for the coming year is one of my favorite parts of my job.

[JuneC]

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.

Aside from already having a reasonably good (general) mental idea of how the new law will change things, this calculation helps more. It is certainly no substitute for sitting down and grinding out a "2018" return piece by piece, but to go that route is untenable and costly to clients. There are only so many hours in a day.

Getting on topic: For the bulk of the returns I've worked on so far, the 2018 federal tax liability will be lower than their 2017 federal tax liability is.

Anyone who focuses on "refunds! refunds! refunds!" is both missing the point and asking for later trouble. If you tell your client their projected taxes will be lower by $1,500 next year, and their "refund" only increases by less than $500. . .you're gonna have a big problem! Helpful hint: The recent federal withholding changes will give taxpayers more/most of their "refund" during the remainder of 2018. Whether those extra funds along the way constitute "crumbs" is an entirely different topic.

Just yesterday I had a client to go off "All my friends are getting big refunds and I'm not" etc. Of course, their 2017 income increased by $8k and their **taxes** only increased by <$750, but that fact was obviously lost. I did inform them that, using the above source, their 2018 federal **tax** would decrease by roughly $1,500. I guess if their refund this time next year is not larger by the same $1,500, I am completely doomed!

Sorry to go off. It just rubs my feathers the wrong way when the only focus is "refunds." Maybe the complainers should just use (whatever is analogous to) "single - zero" on their payroll withholding and be happy with a larger refund in the future.

Alas.

FE

Ah yes, if only our clients would understand the difference between their tax liability and their refund amount. Every year, I try my hardest to educate people, line by line, what exactly is happening on their 1040. Some respond with thanks because 'no one has ever explained that to me before' but most just want to get to the bottom line - the refund. It's so fun when we actually get a client that understands what it all means and they show appreciation when we help them make necessary adjustments for the following year. I didn't mean to imply I was focused only on refunds, that's definitely not the case for me. But sadly, for many of my clients, it's all about that REFUND! And you're exactly right - when people just can't absorb what I'm explaining about tax liability and are whining about getting screwed, I just revert to telling them 'Single and 0 on your W4.' Often times, they come back the following year understanding what I mean when I tell them, 'Your tax is your tax, it's just a matter of how you choose to pay it - a little at a time from your paycheck (at the expense of a smaller refund) or more from your paycheck (which increases your refund).'

ETA - I can relate to your story about hearing what their friends are paying. Along similar lines, I had a gal today who wanted me to tell her how she could get a bigger refund without taking so much out of her paycheck. I suggested putting more into her retirement, she wasn't interested. I suggested putting into an HSA, 'Oh, I don't like those.' And lastly, I joked that she could have more dependents. And when that wasn't an option, I changed the subject because I realized I wasn't going to get through. She felt she was getting screwed by the government and there was nothing I could say that would change that.

[Twin Turbo Z]

I find the simplest way to explain the new tax rates as such. Someone above stated this too. You either get it each week on your paycheck or at tax time. I also tell them if they dont need the extra monies each week, max out their 401k or start an HSA (as mentioned above). That too will help them come tax time next year.