Simple is as Simple Does - The New 1040
This June I made my annual pilgrimage to the desert oasis known as Las Vegas for the AICPA ENGAGE conference. This "megaconference" was a merger of many smaller conferences that had historically been held separately throughout the year. The Advanced Financial Planning conference had always been our primary conference but by joining forces we now have the opportunity to attend sessions from other conferences like the Advanced Estate Planning conference and the High-Income Individuals Tax Strategies conferences. In short, the best minds in the accounting and financial planning professions were all there and I'm still trying to make sense of everything I learned.
My major takeaway from this year's conference, aside from a deep desire for them to hold the conference somewhere other than Vegas every once in a while, was that the tax reform bill passed last year created much more complexity than most people realize. As I've written previously, there will be many individuals with basic tax situations whose tax filings will be simplified as a result of the much higher standard deduction and the elimination of various other itemized deductions. But for a large number of taxpayers, including many small business owners, their tax filings have become incredibly more complex.
Take the new Section 199A deduction, which was added to the Tax Cuts and Jobs Act so that small business owners wouldn't be left out of the tax cut from 35% to 21% for larger C corporations. The 199A deduction allows sole proprietorships, S corporations and partnerships to deduct up to 20% of the income earned by their business. While this might sound straightforward, there are so many limitations and restrictions on the deduction that there were multiple sessions devoted to the topic at our conference, and it felt like we only scratched the surface. Compliance with the new deduction will be complicated enough on its own, but the rule also opens up a ton of planning opportunities that CPA's and attorneys across the country are working to take advantage of as we speak. Unfortunately, we still don't have much guidance from the IRS on this complicated new aspect to the tax law so that planning is being done without knowing exactly how some of these rules will be interpreted. Stay tuned as we learn more more on this in the coming months.
While there are clearly many areas of tax law that have grown more complex as a result of the TCJA, the current administration continues to try to convince us how much simpler they've made things. The IRS recently released a draft version of the 2018 Form 1040 that will be "postcard" sized. Aside from the obvious question as to why we need a postcard-sized version of a tax return when 90% of returns are electronically filed, what they neglected to mention in the press release were the 6 additional schedules that accompany the "postcard." Sure, you could ignore those other schedules, but you might miss out on some valuable deductions that were eliminated from the primary form in order to make sure it was the size of a postcard.
I recognize there are some people who will benefit from the simpler tax forms but for a large portion of the population I don't believe tax filing will be any simpler. Take itemized deductions as an example. With the new higher standard deduction, fewer people will need to itemize their deductions on tax returns starting in 2018. But how do you know if it would be better to itemize or take the standard deduction? In many cases you will still need to add up all your itemized deductions and prepare those schedules before you know if you would be better off itemizing or not. So yes, you might wind up taking the standard deduction and not listing out your itemized deductions, but you still need to track those deductions and run the calculations. If you don't keep track of those deductions you run the risk of paying more taxes than is necessary. After 14 years in the accounting profession I’ve learned that not too many people want to do that.
Between my experience at the AICPA conference and the recent release of the Form 1040, I'm finding it hard to believe the tax reform bill really did much to simplify the tax code. Some taxpayers will find filing simpler while others will find it much more complex. Sophisticated taxpayers are going to be able to stay ahead of the curve by implementing tax planning strategies that minimize their tax liability and save themselves money. We are here to help each of our clients navigate this new tax law and to make sure you take advantage of any planning opportunities available to you.
To learn more about the new Form 1040, I recommend these articles:
- Chris Benson, CPA, PFS
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