Much will be written between now and April 15th about the Tax Cuts and Jobs Act and Americans’ accompanying 2018 federal income tax returns. Most will be either confusing and/or based little on fact.
Political confusion and positioning will take the lead as demonstrated by the political leaders of New York.
New York’s Senator Schumer believes that the President rushed “through a tax break for millionaires and billionaires, paid for by pilfering the pockets and the healthcare of middle-class Americans.”
New York’s Governor Cuomo rushed through a bill designed to allow New York taxpayers to take their state tax deductions as contributions. He boasted that this will save New York taxpayers $17.5 billion. Of course, all but $1.8 billion of that $17.5 billion would be saved by New York taxpayers who earn over $100,000 including 6,206 “millionaire and billionaire” taxpayers who alone will save over $4 billion. As the top rate for individual taxpayers went down by 2.6 percent and there are a couple of other new tax benefits for wealthy taxpayers in the new law, these 6,206 taxpayers will see literally windfall reductions in their federal taxes.
Adding to this intellectual confusion, the Treasury Department has made it clear that it will challenge the deduction of taxes camouflaged as charitable contributions. The Internal Revenue Service will be instructed to use the Shakespeare approach of “a rose by any other name would smell as sweet." Worse yet, an audit is an audit and the taxpayer claiming their state tax deductions as contributions can certainly expect the IRS to find great interest in their complete tax returns. And of course, there will be those pesky penalties for negligence and underpayment etc.
Republicans will continue to claim that filing tax returns will be easier. This is overstated because even those taxpayers moving from itemized deductions to the new, higher standards deduction will be filing state tax returns that will require the information no longer necessary for the federal tax returns.
The IRS has prepared a new Form 1040 which was designed to give the appearance of an easier to complete form. That being said, the new Form 1040 essentially only turned the old first two pages into four pages for taxpayers who have income from sources other than salary, interest, social security pensions or make estimated payments or apply a prior year payment to the current year taxes. Truly, little if any simplicity accomplished.
One major pitfall of the now Form 1040 is that it is insufficiently clear that seniors are entitled to a larger standard deduction than everyone else. I anticipate that millions of seniors preparing their own tax returns will not deduct the extra $1,600 standard deduction they are entitled to for 2018 as the new Form 1040 requires a careful reading to see that a senior need to look at the instructions and then an adventure finding the answer in the 118 pages of instruction. Another major pitfall is that many IRS forms are not as yet available and the government shutdown will probably slow the release of those forms.
It will be an interesting year for taxpayers.