Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
There are so many wonderful things about spring. Flowers are starting to bloom, the grass is green, and (hopefully) Chicago is done with snow! But as accountants, we sometimes look at spring with unease. We’ve worked hard all fall and winter to help our clients prepare for April 15th, but how will our collective efforts pan out? While the work of tax season is fresh in our minds, we wanted to share our insights into the lessons learned during the 2018 tax season (Cray Kaiser’s 47th tax season).
Last January, the IRS adjusted the federal tax withholding tables to reflect the reduced tax rates that would apply during the 2018 tax season. As a result, many employees enjoyed higher paychecks, at the sake of reduced federal tax withholding. The problem was that the tables were too generous in reducing federal tax withholding. The tables didn’t take into account other changes in the law, including the loss of tax deductions by higher income individuals. As a result, many taxpayers faced significant, unexpected tax bills.
If you fell into the camp of being disappointed with the tax results, let us know. We can plan beyond the basic tax table to advise not only the appropriate federal tax withholding rate, but also other tax minimization ideas.
The 20% deduction for Qualified Business Income (QBI) was one of the most discussed topics this year. It was not until the summer of 2018 that we received more clarity on “specified service” businesses. There are still uncertainties in the law, which we hope will be ironed out via additional guidance. That said, many of our clients took advantage of the new deduction and the advance planning surrounding maximizing the QBI was effective.
On the flip side, we saw a significant delay in tax reporting from partnerships and S corporations that hold businesses that may generate QBI. Hedge funds in particular will face extremely challenging reporting requirements for the QBI. We expect that some K1’s will arrive even later in the summer of 2019.
Effective for the 2018 tax season, the standard deduction was increased ($12,000 single and $24,000 married filing jointly). Given the $10,000 limit on the income and real estate deduction, as well as the elimination of miscellaneous itemized deductions, many taxpayers’ standard deduction was higher than allowable itemized deductions. Taxpayers that found themselves in this situation would likely anticipate that the standard deduction will probably be more beneficial in the near term. Those taxpayers should consider steps to better plan controllable tax deductions in order to maximize the benefit of the deduction.
At the time of this writing, a mere week after April 15th, our clients have already started receiving tax notices from both the IRS, and more so from the Illinois Department of Revenue. Our advice: Don’t panic! Most of these notices are showing disallowed deductions or credits, but that doesn’t mean the notice is correct. The revenue agencies are simply asking for more information. If you receive any such notice, forward it to your tax advisor. They will be able to provide the information necessary to rectify an apparent underpayment with the information supporting the tax position.
Sadly, there continues to be an uptick in fraud and scams, and tax returns are no exception. As an added protection, the IRS has in recent years provided an Identity Protection (IP) PIN to affected taxpayers. The PIN is a six-digit number assigned to eligible taxpayers that helps prevent the misuse of their Social Security Number on fraudulent federal income tax returns. Taxpayers with a PIN must use the PIN on their tax returns in order for the IRS to accept the tax filing.
Recently, the program opened up to taxpayers here in Illinois. We believe that requesting an IP PIN is yet another tool to help you protect your identity. Please contact us if you’d like to learn more.
While it’s easy to bask in the glow of another tax season behind us, we believe it’s important to continually learn. When a rainy spring day arrives and you want to look ahead to 2019 taxes, give us a call at 630-953-4900. We are happy to walk through the nuances of your tax return in order to plan effectively for next year.
