Updated October 15, 2019
Now that the extended deadlines have passed for 2018 returns, we can take a moment to reflect on the lessons learned throughout a challenging year. Below we’ve put together five major take-aways we have come across to aid in planning for the 2019 tax year and beyond. To this end, please keep in mind the IRS stats utilized herein were compiled after the April, 2019 filing date.
The 2018 Tax Season: Our Major Takeaways
1. The TCJA Made Americans Hungry for Information
Most of the changes from the Tax Cuts and Jobs Act were implemented as of January 1st, 2018, causing a fair amount of confusion for taxpayers. The TCJA was a huge overhaul to the tax system and almost all taxpayers were affected by some aspect of the law, leaving people and entities to wonder how their tax filing would change for the 2018 tax year. Since most parts of the TCJA expire after 2025 barring any updates, income tax preparers and CPAs would do well to continue to stay up to date on the dynamic law and keep their clients as informed as possible.
2. More People Owed Money Than In the 2017 Tax Season
According to statistics released by the IRS regarding the 2018 tax season, the number of refunds remained steady, but the average tax refund issued declined from 2018 to 2019. Major changes from the TCJA meant people weren’t receiving as large of a refund, or owed money to the Internal Revenue Service, compared to last year.
Changes to the federal tax withholding tables for 2018 led more people to withhold less in 2018. Combined with the changes from the TCJA, this meant more filers owed money or had a reduced refund at the end of the year. The total amount paid to the IRS evened out over the course of the year, since filers didn’t pay as much over the course of the year but paid more at the end, but withholding less still led to a smaller end of year refund.
The increase in the standard deduction plus the itemized deduction cap meant fewer people could itemize for the 2018 individual income tax year. Combined with the elimination of other miscellaneous tax deductions, this change meant higher taxes for those who had itemized in the past.
Higher income taxpayers dealt with a $10,000 cap on deductions for state and local taxes. To further add to the reduction in refund, the $10,000 cap was applied to both individual filers and married filing joint filers, leaving married couples with an even lower refund or higher amount owed to the IRS.
Moving forward with the 2019 tax year, preparers and filers should consider amending their federal tax and state tax strategies to account for these changes. Individual clients’ personal finances should be considered, and quarterly tax payments may need to be made for more clients.
3. Extensions Were More Common
With the government shutdown ending on January 25th, 2019, there were plenty of setbacks within the IRS, including delayed tax forms and filing availability. On top of that, the complications of the TCJA meant CPAs and tax professionals received more first time requests for work than in previous years. Coupled together, these issues created an expected 14.6 million requests for a filing extension. Returns were also more complicated and preparers had to consider the implications of the TCJA when working with their clients. To ensure the correct application of the law, many preparers chose to file extensions rather than hastily prepare returns to meet the filing deadline.
Going into the 2019 tax season, individuals and entities should consider hiring a preparer early on in the process instead of waiting until the last minute, and preparers should consider hiring more employees to delegate work to early on in the filing process and e-file before the filing deadline.
4. We Enjoyed Our Business Income Deductions
Although there were plenty of tax refund reducers in the TCJA for 2018, there was good news in the form of the Qualified Business Income Deduction (QBID). Although the rules surrounding the deduction were complicated and allowed for some phase out (depending on the entity and type/level of income), many qualified business owners enjoyed a 20% deduction on qualified business income. Going forward, preparers can adapt their tax strategies for clients to take advantage of any QBID available.
5. Employing Automation Makes the Job Much Easier
There were plenty of surprises lurking in the 2018 tax season, causing many preparers to rethink their strategy going forward. Between changes in the law and an increase in people wanting paid preparers due to complexity, many preparers were faced with more work than they were initially expecting.
Automation early on in the process can help many preparers reduce their workload, take on more clients, and provide better service to their clients. Specifically, preparers should consider implementing tax software and automating data collection from clients, client requests, data entry, and task delegation. They should also consider e-filing with all of their clients and setting up direct deposit. Creating processes around these tasks early on can help tax professionals spend more quality time on complicated tax issues for their clients during tax season.
By learning from the 2019 tax filing season, we can be more prepared to tackle the TCJA during the 2020 filing season and stay informed on a dynamic tax law. If you want to keep up-to-date on tax reform, check out Surgent’s tax reform CPE courses designed to help you provide the best service to your clients.
Megan Bierwirth graduated from the University of Kentucky in 2013 with a Bachelor’s of Science in Accounting and passed the CPA exam within 6 months of graduation. She worked in both public accounting and industry while becoming a CPA and now runs a virtual bookkeeping company focused on preventive, integrative and complementary medicine professionals.