After spending well over 40 hours this month attending various seminars to study the intricacies of the tax reform from the perspective of the IRS and other tax compliance experts, I was interested to hear the interpretation from a ‘non-IRS’ perspective, as well as the questions being asked by members of our community.
Over the weekend, I was fortunate enough to attend a seminar presented by Akash Chougule, a well-respected author for Forbes (forbes.com/profile/akash-chougule) and Director of Policy for AFP. Not only was his perspective on the implications of the tax reform thought-provoking, his unbiased, non-political approach to educating the community, his knowledge of economics as well as 'the policy behind the reform' was very interesting.
Unfortunately, as I listened to the members of the community offer their input and ask questions, I also became very disheartened to hear the misinformation many have received about how the tax reform will impact them, often times from their own accountant. In addition, many taxpayers are expecting a larger tax refund next year, but that won't necessarily be the case.
Based on their understanding of the tax reform, many taxpayers are erroneously expecting a significantly higher refund next year, which is simply not the reality for most.
A few weeks back, we urged you to verify the accuracy of your reported personal allowances using the IRS withholding calculator. (BEWARE - Tax Reform May Cause You to Owe the IRS Next Year) Subsequent to hearing the erroneous interpretations of many individuals regarding the tax law and the tax reform, I hope the following examples will further demonstrate the importance of reviewing your current allowances, with respect to the updated tax rates and tables.
As you read the examples below, and continue to discuss the tax reform with others, please bear in mind:
Tax Return - the actual forms filed with the government (typically, form 1040)
Tax Liability - the total tax calculated and reported on your tax return; based on your taxable income
Tax Refund - the federal withholding in excess of tax liability reported on your tax return that will be returned to you via direct deposit or paper check
**The examples below are not intended to be all-inclusive, nor are they meant to represent your particular tax situation; they are very simplistic illustrations of the potential impact the tax reform can have on your future paychecks as well as your tax return.
EXAMPLE 1: Bob is a single individual with no children and grosses $52,000/year ($1,000/wk). Bob will not itemize his deductions in 2017 or 2018.
Assuming income and deductions remain the same in 2018 -
Bob will benefit from a decrease in his tax liability of $1,406 in 2018 but his refund could be up to $206 LESS than in 2017.
EXAMPLE 2: Bob & Jane are a married couple with no children; each of them gross $52,000/year ($1,000/wk). Bob and Jane will not itemize their deductions in 2017 or 2018.
Assuming income and deductions remain the same -
Bob and Jane will benefit from a decrease in their tax liability of $2,805 in 2018 but their refund could be up to $829 LESS than in 2017.
EXAMPLE 3: Bob & Jane are a married couple with two young children; each of them gross $52,000/year ($1,000/wk). Bob and Jane will not itemize their deductions in 2017 or 2018.
Assuming income and deductions remain the same -
Bob and Jane's family will benefit from a decrease in their tax liability of $2,857 in 2018 but they could pay in up to $1,609 LESS than in 2017.
Although the overall effects of the tax reform will be positive and are expected to spur production and job growth, not all taxpayers will experience uniform, or anticipated, tax reductions. Those with high state and local taxes, including those with multiple homes, and those with significant employee business expenses and union dues, may not be equally impacted by the tax reform due to the reduction in allowed (itemized) deductions. Be sure to speak to a CPA who is well-versed in the implications of the tax reform and stay abreast of how these changes (and continued guidance issued by the IRS) will affect your specific situation.
While we are, of course, available to provide you with any business, accounting or tax services, the information contained herein is general in nature; any advice regarding those services should not be construed as tax advice and is not intended as a thorough, in-depth analysis of specific issues, a substitute for a legal, accounting or tax advice or opinion, nor is it sufficient to avoid tax-related penalties to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact Strive Tax & Accounting, LLC or other tax professional prior to taking any action based upon this information. Strive Tax & Accounting, LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.