Generally, I would say that for those whose returns were simple last year it is still simple, and for those whom have a lot going on, still have a lot going on. There will be a migration of people into the simple category so one could say technically there are ‘more’ simple tax returns than last year – but it is totally inaccurate to say that tax return preparation is ‘simpler’ for all taxpayers.
Sadly, one of the most accurate answers in individual income tax to any tax question is ‘it depends’ or ‘maybe’. There certainly are a good number of hard lines drawn in the sand in regard to your tax return, but so much else has a different result based on the individual facts and circumstances for that taxpayer. It is 100% possible for the exact same thing to benefit one taxpayer and be no benefit to another taxpayer.
The big thing everyone is talking about or referencing is the increased standard deduction. This deduction is a flat dollar amount you are able to reduce from your total income. The resulting reduced income amount is what is used to calculate your tax. The standard deduction is based on filing status: Single, Head of Household, Married filing jointly, Married filing separately, Qualified Widow. The deduction amount compared to 2017, is nearly doubled. What that means, is in the past if your total itemized deductions (things like mortgage interest, property taxes, charitable giving) was a bigger total than the standard deduction, you utilized your larger itemized deductions to lower your total income even more for the tax calculation. One of the ‘simple’ questions comes about for those whose itemized deductions are more than the old standard deduction, but less than the new one. Let me give an example:
Peter Pan and Wendy get married and start working (make believe meets the real world). Their total income is $100,000.00 for 2017. With the mortgage interest they paid, property taxes paid, and all the money they donate to orphanages (Mr. and Mrs. Pan have a soft spot in their hearts in the regard, as you might imagine) their total itemized deductions are $16,550.00. The standard deduction is $12,700 for 2017 married filing jointly. Peter and Wendy can choose to either reduce their income by $16,550 or by $12,700. Guess which one they choose… Now enter 2018, the standard deduction for married filing jointly is $24,000. If Peter and Wendy have the same deductions (it will never be the exact same, but this is make believe anyway) then then can choose to reduce their income by $16,550 or by $24,000. Once more, the choice seems very clear.
Truth is sometimes a matter of perspective, or point of view. If I held a book up, and one side was red and one side was black – asking you what color the book was, all you see is the red side and would answer red. I would see black and answer no. Both of us would be right. The same will work with the standard deduction. One could look at Peter and Wendy’s situation and say because they will use the standard deduction, they don’t need to even bother gathering the documents they need for their house, or donations – therefore the tax return preparation for them has been simplified. That truth from that perspective is correct. It would also be just as correct to say it is the same as it always was, because they still gathered all their information to calculate the difference – even though the standard deduction was bigger, they wouldn’t have known until they counted their itemized deductions in the first place.
Tax preparation is often joined with tax planning for the future. We are doing 2018 taxes now in 2019… but now I have 2019 questions because it is now a new tax year, how do I ensure I am on track or stay on track for this year? I will illustrate just a couple of topics in regard to being simple or not being simple:
The child tax credit is changing in 2018. It has an increased amount but is treated different based on your total tax liability. If you have a lot of tax, the credit will offset $2,000.00 of tax per child under 17. That is awesome. What if you have very little, or no tax because of other deductions? There is a refundable credit for children under 17, but it is only $1,400.00. The same child, on two different tax returns, has a different result to the taxpayer – based on the taxpayers’ circumstances. Most tax software will simply calculate this, so one could easily add this to the ‘simple’ category. What about tax planning? How do you figure the difference for changes next year, or the year after with now two numbers for children? I wouldn’t be so quick to put the child tax credit in the ‘simple’ category anymore.
There is a new deduction with something called QBI – qualified business income. It works for those in a partnership, self-employed, even an S-Corp. There are however a lot of caveats to the deduction. Service based industries aren’t allowed to use it except for a few fields. If your taxable income (not AGI) is less than a certain amount, then you can use the QBI deduction even if you are in a service industry. If you qualify for QBI but have over an amount of taxable income, then there is a limitation based on wages paid. It runs circles around itself. Viewed from afar, it is a great thing – an extra deduction for those that are eligible. Determining who is eligible because of all the ‘if / then’ inside that new deduction alone – I would categorize as not simple.
In the end, circling back to how we started, there will be plenty of people who have simple tax returns. Be it simple from 0 complexity (I have 1 job and live in an apartment), or because of the new standard deduction perspective (I won’t itemize so I’m not going to bother even gathering the info together). There is arguably more complexity for everyone who does not fall in the ‘not simple’ category. At best overall tax return preparation is as equally challenging as it has always been. If you would like a little insight into where you fall on this spectrum, feel free to call us at 281-440-6279.
Senior Tax Professional