Surprised by your tax return?
February 20, 2019
Lia Bertelson
Lia Bertelson
Certified Financial Planner™
Investment Adviser Representative

2018 was Year 1 of the Tax Cuts and Jobs Act signed into law in 2017, so we are just now seeing the results for families as they begin to file their tax returns.  Here are a few of the biggest factors we have seen in people being surprised by the effect of the changes.

The 20% deduction for qualified business income from pass-through entities (partnerships, LLCs, sole proprietorships, and S-Corps). It was unclear at first whether this deduction would apply at all to “specified service trade or businesses” like law practices, medical practices, financial planners, and accountants.  In the end it does apply to those businesses, but only under an income cap.  For single filers, the deduction starts to phase out at $157,500 taxable income and at $315,000 for married filers.  A partial deduction is available for filers whose income is between those limits and $207,500 for single filers and $415,000 for married.  This could be a pleasant surprise for those of you who had heard that these specified fields would be excluded entirely.

The “kiddie tax” is more brutal now.  If your children have unearned investment income from accounts in their own name, the tax bill on that income will be higher this year.  In the past, unearned income above $2,100 per year was taxed at the parent’s tax rate.  Now it will be taxed at the tax rate for trusts and estates, which is higher.

The higher standard deduction may not help you, even if you are not an itemizer. The standard deduction was increased to $12,000 for individuals and $24,000 for married couples, which should reduce the number of filers who itemize their deductions.  The unfortunate counter-effect is in the disappearance of the personal exemptions.  In 2018, filers could deduct $4,050 per member of their household if Adjusted Gross Income was under $156,000.  This year those exemptions are gone.  So for a family of four who did not itemize, the increase of $11,300 in standard deduction is more than offset by the loss of $16,200 in personal exemptions.

Your withholdings may not have been enough.  After the tax law was passed, in order to make the public feel good about it right away, withholding amounts were adjusted down so that paychecks got bigger.  It appears that for many, the withholding was adjusted down too much.  One family I spoke with left their W-9 forms filled out with the exact same exemptions for 2018 as they had claimed in 2017. There were no other changes in salary.  Instead of the $4,000 tax refund that they were expecting based on past experience, they have a tax bill of $4,000 now.  The withholding calculations were adjusted too far.

Have you filed yet?  Tell us if your return surprised you this year.

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