Have a Partnership?

You may be sad to hear how the IRS has been failing to audit you.  While they manage to audit about 27% of large corps, they only get around to about 0.8% of large partnerships.  The income/loss is generated by one entity, but taxed at multiple others.  If your partnership makes a boo boo, they then have to investigate you and all your buddy partners to recoup that tax money.  This is neither fun nor efficient.  So, in an effort to produce an estimated $9.3 billion/year, the IRS has now developed the “centralized partnership audit regime” (CPAR.)  Unless you elect out, annually, if the IRS finds that boo boo, they can assess taxes directly to the partnership at the top rate, like a C-corp.  Ouch.  Interested in an off-ramp?  Let’s talk.  PS  States are looking for their own CPAR band wagons.

Some taxpayers will be delighted to hear that AMT finally got a makeover!

In 1969, 155 taxpayers with incomes over $200K did not pay income tax, there was public outrage, and 10 years later, the Alternative Minimum Tax (AMT) was born.  Yup.  It took  10 years!  Today, we change things virtually overnight.  (And sometimes, retroactively…but don’t get me started.)

In 2017, AMT hit 5.2 million taxpayers, many with solid middle class incomes and lifestyles.  This was never the intent of AMT, but simply the result of bad math and unexpected inflation.

For 2018, the estimate is that only about 200,000 people will get hit with AMT.  The math is still crazy, so let’s just be glad you probably no longer have to worry about it.  (Well, most of you, anyway.)

Then, the good news for many filers is the nearly doubled standard deduction.  Most tax policy wonks estimate more than half of all Schedule A filers will now happily take the standard deduction for federal purposes.

$24,000         Married/Joint

$12,000         Single and Married/Separate

$18,000         Head of Household

Formerly, you had a deduction, and an exemption.

Your itemized deduction included state income taxes, home mortgage interest and real estate taxes (for up to 2 homes) plus charity, medical (within limitations,) and certain business expenses (within limitations,) among other things.  State and local taxes (SALT) now have a limitation of $10,000.  This applies to your state income taxes, any sales tax, personal property taxes, and real estate taxes.  Limiting this to $10K hurts a lot of people.  However, the powers-that-be felt the new limit contributed to a leveling of the playing field.  We shall see.  I do know a lot of DIY people did not understand Schedule A, and mistakes were very common.

Also changed – you can no longer take a deduction for your investment fees, your tax prep, or your employee business expenses.  Granted, most regular folks never got this deduction because even if they filled out the forms, the amounts did not go over the threshold.  But it was apparently fun trying.

Some people will still itemize!  I expect seniors will still have heavy medical expenses, and some people will still be extremely charitable.  They talked about limiting charity, but they did not do it.  (Yet.)  Some people are reorganizing how they give so as to improve their tax situation.  Example:  Give a whopping amount every second (or third) year so as to itemize, but then slack off to the standard deduction in the off years.

As for that exemption – well, it’s just gone, too.  No more multiplying by all the people you managed to cram into your tax return.  Instead, there is an increased $2000 deduction for each child under age 17, and they’ve added a $500 “Other Dependent Credit” for miscellaneous other dependent relatives.

The forms were restructured.

All people now file on the same Form 1040.  No 1040-A.  No 1040-EZ.

There is rumor of a new form for seniors (1040-SR,) but nobody really knows why.  If both rich and poor non-seniors can file on the same 1040, why can’t rich and poor seniors file on the same 1040.  Maybe 1040-SR will have larger type?  Or bigger spaces to write in?

What happened to the postcard?  Think about it – do you really want your SSN sent by postcard through the mail?  Ted Cruz may be a helluva guy, but this was not a good idea.

Instead, we have 2 half-pages, which are thankfully being printed on 1 side of 1 piece of paper.

The top half is the demographics, in this order:

Your filing status

Your name and SSN

Your spouse’s name and SSN

Your address

Your dependents with SSN, etc

Your signature (and mine)

The second half of the page is a quick recap of your income, and how it’s taxed.

The most basic income information (totals for wages, interest, dividends, IRAs and pensions, and Social Security benefits) comes first.  The rest of the information has been organized into 6 sections, which are called Schedules 1, Schedule 2, Schedule 3, Schedule 4, Schedule 5, and Schedule 6.  (Clever.)  Pretty much all of the forms and schedules we used to file have been coordinated into these 6 schedules, and their totals flow to the second half of the 1040 page.

But some information appears on its own line, with no help from a newly numbered Schedule.  This includes your deduction (standard or itemized,) the new QBID, any withholding totals, and various refundable credits, plus the math.  I think they could have done a better job.

It is interesting to note that they managed to highlight the refund section by putting the word “Refund” in large, bold type, offset to the left, while they downplayed any amount you might owe by using a smaller font and tucking this information at the very bottom.

And did you notice the very first line, up at the top, was your filing status?  Now we know what they’re really interested in.

Tax Reform – Like it or lump it – it’s the law. 

Late December 2017, Congress gave the American people the most far-reaching tax code changes since income taxes were first shoved down our throats created.  They changed forms, rules, and thresholds.  Some cherished provisions were wiped away, and new twists were created.  Some changes are “permanent” while others are “temporary.”  In my opinion, now that congress has a taste for tax-law tinkering, nothing in tax law will ever be permanent, and I fully expect each new administration – state and federal – to take a swipe at it.  Be that as it may, our government is still issuing guidance on various provisions.

And so we begin a series on Tax Reform.  Not everything…just the HIGHLIGHTS that impact my people, and just the broad strokes because if you really want all the details, you may as well read all 400 pages of the Tax Cuts and Jobs Act of 2017, and then move on to the hundreds of additional pages of guidance issued (and still being issued) by the Internal Revenue Service.

Most people just want to know what it means in practice, and so that is our focus.