Speaker: Tax Law Changes Mean Simpler Filings for Many Clients

Chris Gaetano
Published Date:
Jan 9, 2018

The raft of new tax provisions recently signed into law means that many complex planning issues will become much simpler once everything goes into effect, according to Joseph Sanford, president and CEO of Sanford & Company, who spoke at the Foundation for Accounting Education seminar "Getting to the Heart of Tax Reform: Individual Income Tax Strategies."

A big reason for this simplification comes from the doubling of the standard deduction to $12,000 for individuals and $24,000 for married couples. This, he said, covers the vast majority of taxpayers, including many who individually itemize deductions right now. They simply won't have enough deductions to get out of the standard deduction's range, and so the complex calculations currently necessary for many items won't need to be done for these clients. 

"This will cause a lot of people not to itemize deductions. How many times do you get calls from clients asking, 'How much should I finance on the purchase of my new primary residence?' ... Well, how much tax benefit will there be to the interest deduction? Well, some. Maybe none. Until they get over the standard deduction, there's no tax benefit," he said. 

Sanford said that he recently got a call from a client who told him she'd paid off her car and house and makes $3,000 to $4,000 in charitable contributions a year. She wanted to know what she should be doing for 2018. Sanford told her that, unless she plans to dramatically increase her charitable contributions, "it doesn't make any difference, taxwise, what you do." He noted that, with miscellaneous deductions eliminated, the client could only really count on a $10,000 state and local tax (SALT) deduction plus the charitable contributions which, combined, are far from the $24,000 standard deduction that applies to her (and her spouse). 

"Just not gonna matter. I think there [are] millions of taxpayers that will fall into that kind of scenario. It doesn't matter what they do; the standard deduction will be a greater dollar amount to taxable income. ... This is a big deal because it makes tax prep so much simpler," he said. 

Sanford said that, for clients who really don't want the standard deduction, he recommends what he calls the "ping pong" approach. Basically, don't take any itemized deductions one year, then, the next year, double the itemized deductions to the fullest possible extent, and the year after that once again return to not taking any itemized deductions at all. While benefiting from itemized deductions every other year instead of every year might not be ideal for some clients, it at least lets them get something for the trouble.

Another area where filing became much more simple was the Tax on a Child's Investment and Other Unearned Income, colloquially known as the "kiddie tax." Sanford said that working with this tax has generally been a trying affair, as it's "kind of complicated." It required complex income calculations that were further complicated by factors like divorced parents and determinations of what income belongs to which person. The new law, he said, simply changes the formulation to match trust and estate taxes. This makes filing much easier, though he warned that it won't necessarily mean savings on the part of the taxpayer. 

"Their unearned income is going to be taxed at the same rate as trusts and estates. That doesn't make it better, in my opinion, because tax rates for trusts and estates are pretty punitive. ... Still, I think it's effective in terms of curtailing opportunities to sprinkle income among young family members and will simplify the process of preparing the return," he said. 

Similarly, with the exemption for the federal estate tax increasing from $5 million to $10 million, many clients who previously needed complex estate planning will now be fully within the exemption and need none. 

"This is a huge difference to me. In my practice, and mine's a small accounting firm, ... it pretty much eliminates the tax planning I have done in the past for estates," he said. 

Sanford also talked about the cap on SALT deductions, a contentious provision affecting mainly states with higher tax rates. Since the people who had been using the unlimited SALT deduction before generally had more than $10,000 in state and local taxes, the cap means clients will just be able to claim the (now smaller) deduction without the need for complex calculation. 

"For a lot of taxpayers, that will make that part of tax prep pretty simple. I don't really need to see property tax bills, I don't need the actual numbers, because I know they're way more than ten grand, so just put down ten grand. I don't mean to be cavalier, but for most taxpayers just put ten grand on and move on," he said. 

While certain states that would be particularly affected by the cap, like New York and California, had said residents could prepay their taxes in 2017 in order to take advantage of the deduction before the cap went into effect, Sanford was not confident this would work. He noted that the statute has language very specifically saying people are not allowed to do that. 

But it's not all simple. While the tax bill has simplified many matters, it's also introduced new complications. For one, the preparer due diligence requirements for those with clients claiming the Earned Income Tax Credit has now been expanded to every refundable credit. Preparers who previously hadn't needed to think about it at all will now need to familiarize themselves with the issue. 

"Be sure to tune in to due diligence issues. You don't want to be the guy the IRS nails for that," he warned. 

He also cautioned that preparers can't assume that a client's taxable income will be the same after the new law. While the rates are lower, this may not necessarily be relevant because some lower rates may not apply to the same taxable income, as the rates kick in at different thresholds than they do now. Other provisions in the sprawling legislation will also affect what is and is not taxable income in other ways. 

"So you need to be careful how we interpret the information relative to the new tax law, because more than one change affects the actual overall effective tax rate suffered by different individuals," he said. 

There are also the complications of devising new tax strategies in response to the changes. For instance, Sanford said that, to compensate for the loss of miscellaneous deductions and personal exemptions, preparers might increase their use of office and home deductions, and as a result "we will be looking for every excuse, reason, ideology, logic, whatever you want to call it, to characterize it as a trade or business expense." He also brought up a strategy, popular about a decade ago, that was used to get around a 2 percent deduction limit for professional fees, "our fees." 

"Didn't we get clever about the 2 percent? We started thinking, 'Why put all our tax prep fees on Schedule A? Shouldn't we be putting some of those on Schedule C, Schedule E, Schedule F?' Whatever we can justify. The same theories [that] applied then will apply going forward," he said. 

Other old standbys, however, are going to be phased out, and preparers will need to figure out ways to adapt. Sanford noted, for instance, that after 2017, "this age-old trick of converting to [a Roth IRA] before year end and then deciding, by April 15, to recharacterize it if we decide the conversion wasn't to the taxpayer's benefit" will no longer work after this year. However, he said, people will still be able to change a Roth contribution to a traditional IRA. This means that while Roth conversions are still a viable tool, their use will change. 

"Roth conversions are now long-term strategic plans, not tactical moves. We can't do that year-end conversion and then early next year decide what the best position is," he said. 

And then there are technical issues and unanswered questions with the law itself. For instance, the new tax law has eliminated casualty and theft losses, save for those taking place in federally declared disaster areas (until 2026, at which point the code returns to 2017 rules). An audience member asked whether this means Ponzi scheme losses are no longer deductible. Sanford paused for a few long seconds and said that that scenario hadn't even occurred to him before. He thought some more and said he didn't know. He said that the bill's writers probably didn't think of that, and said this was a good example of how much extra work will be needed on specific parts of the tax bill. 

"I suspect we're going to see at least one, maybe a dozen, patches, if you will, to this bill. Because things like this will come to surface, and Congress is going to react one way or another to those things, and you'll have a technical corrections kind of bill coming down the pike that will answer some of those questions," he said. 

Click here to see more of the latest news from the NYSSCPA.