New tax law: Believe the bad hype? Local preparers say changes are misunderstood

Brian Stetina with Faw Casson public accountants prepares taxes in Dover. Delaware State News/Marc Clery

DOVER — Newsstands awash in headlines like “Tax season shocker” and “Americans shocked by impact of new tax law” may have some Delawareans headed to their accountant’s office with the jitters.

But local tax preparers are cautioning against believing the hype. They feel that a flurry of media attention around the Tax Cuts and Jobs Act (TCJA) passed in late 2017 have left the changes widely mischaracterized and misunderstood.

Being heralded as the biggest tax code overhaul since 1986, the most obvious changes include standard deduction increases, the elimination of personal exemptions, an increase in child tax credits, state and local tax deductions were capped, the Affordable Care Act mandate was repealed and mortgage interest deductions were reduced.

The nonpartisan Tax Policy Center projected the tax law would reduce individual income taxes by about $1,260 on average. In practice as well, local accountants are seeing a reduced tax burden for their clients.

Dover accounting firm Faw Casson’s Director of Tax Services Brian Stetina said overall his clients were seeing lower taxes, but there were examples of people seeing a smaller refund than they’d grown accustomed to.

“When the IRS changed the withholding tables for W2 employees in 2018 most people started getting a little bit more in their checks throughout the year,” he said. “Now that they got back more in their check, they’re not getting as much back at the end of the tax year in a refund — not realizing that they actually got to hold onto more of their own money in the first place. Some folks are missing the correlation there, and that’s been the most common thing that we’ve been seeing with anyone in that position.”

Agreeing, Eric MacCollum, a managing partner at the Hudak & Company accounting firm, says the media reports he’s read aren’t accurately capturing the experience of this tax season.

“Dollar for dollar, our clients are in a better tax positions this year, even if their refund is smaller,” he said.

“You can’t compare your refunds to what you paid in taxes. Refunds are you getting your own money back. A refund means you paid too much money throughout the year and when you file a tax return it becomes clear you overpaid. A smaller refund mean you overpaid less.

“The question I always ask people is: What could you have done with that money throughout the year? Sure it’s nice to get a lump sum check, but you could have used that money better in your own pocket — saved it, invested it or got some growth out of it.”

From accountants’ perspective, a focus on the refund dollar amount distorts taxpayers’ priorities. Rather, zeroing in on the total the government is taking directly out of their paychecks is the more instructive sum, they say.

“We need to look at the tax amounts, not the refunds,” said Warren Hudak, the firm’s owner. “We deliver more than 1,000 tax returns per year and inevitably when we ask, very few customers are able to remember what they paid in taxes total the previous year, but they can sure tell you about their refund. This law may be a good opportunity to remind taxpayers that they should pay attention to what it is they’re actually paying.”

So far this tax season, Mr. Hudak noted that 63 percent of the firm’s clients were paying less in taxes, 31 percent paid about the same as the year before and six percent paid more.

“Those that are paying more fall into two general classes: people who have more investment expenses and people with unreimbursed employee expenses,” he added. “A lot of sales employees have deductible expenses that are no longer deductible. But we’ve been advising our clients on workarounds for those circumstances where the employers can get the money to their employees tax-free.”

Ralph Cetrulo, a partner at the Stephano Slack accounting firm, balks at recent media reports for the same reasons.

“The whole narrative out there right now that people are getting smaller refunds is a false narrative, because people are paying less in taxes overall,” he said. “In all the planning I’ve done so far, 99.9 percent of our clients were going to see a significant decrease in their tax bill.”

Like Mr. Hudak, Mr. Cetrulo noted possible exceptions in instances where employees handle their own expenses.

“With the elimination of miscellaneous itemized deductions, that person could get hurt, because they no longer get that deduction,” he said. “But what I’ve told our corporate clients with staff in that position is they can lower their salaries, but pay their expenses — that way, it’s a win-win for everyone.”

Changes

Mr. MacCollum says one of the biggest changes in the law for individual filers was the change in standard deductions.

“Every individual is getting a $12,000 standard deduction if you’re filing single, $24,000 if your filing jointly,” he said. “In my opinion, what they’re attempting to do is move more people to just taking a deduction as opposed to itemizing. For some, this could actually be a good thing because if their taxes become simpler by just taking a standard deduction, they may not need to pay someone to prepare their taxes for them.”

While the $4,050 personal exemption for each dependent was eliminated, the child tax credits were brought up from $1,000 to $2,000 and there’s also a new $500 credit for non-child dependents.

Previously, there was no limit on how much state and local income tax could be deducted by a taxpayer, but the new law caps it at a maximum of $10,000. As far as mortgage interest, a taxpayer can deduct up to $750,000 in interest — down from $1 million. The interest deduction on home-equity loans was eliminated.

As far as business owners are concerned, some of the new changes have been advantageous, said Mr. Stetina.

“There’s the new 199A deduction which is a 20 percent deduction on your business income, that’s driving down a lot of income this year and really helping business owners,” he said. “If I’m a sole proprietor and I have $100,000 of net income, I’m getting a $20,000 deduction for doing nothing. That’s pretty sweet.”

Mr. Cetrulo, whose first tax season as an accountant was back in 1988, says he believes the new law is the most “pro-business” tax overhaul that’s been enacted.

“If you look back over everything that’s been done over the past 30 years, people have either raised rates, lowered rates, got rid of or added deductions, changed capital gains rates or bonus depreciation, but this was an act that had business owners in mind,” he said.

Where it falls short, in his opinion, was that it was “rushed.”

“It’s pro-jobs, but it’s sloppy,” he said. “They rushed it and it was written poorly. The law that passed Congress actually had handwritten changes on it that were made in the 11th hour. Leading into the tax season we still had a lot of temporarily regulations. Final regulations for some things didn’t even come out until this January after the planning season.

“Much to my surprise, the software vendors have done a good job making all the needed changes quickly, but still things are a little more messy than they should have been.”

Planning ahead

For “W2 employees” going forward, all the accountants recommended examining their withholding for the 2019 tax year to make sure the proper amount is being held from their checks.

“If you were surprised by your tax bill, you may have been underwithholding and didn’t pay enough throughout the year,” said Mr. Hudak. “We’re sending our clients to IRS.gov to use their withholding calculator. Changes to the tax code, changes in employment or even getting more than one job are all good reasons to revise your W4 to make sure you’re withholding the proper amount.”

However, Mr. Hudak stresses that a large refund is much more a symptom of financial mismanagement than it is a beneficial windfall. He’s long said that the “perfect tax return” is zero dollars refunded and zero owed.

For business-owners and investors, the accountants suggest spending time examining the potential benefits of the new tax law.
On whether or not the law was a good thing, they assumed a wait-and-see approach.

“It’s hard to say what the outcome will be,” said Mr. Stetina. “When there have been tax cuts in the past, the point has been to stimulate the economy — generating more cash flow to hire people and expand. If the companies making out well are saving money and are doing that, then yes, this’ll be a good thing. But, you don’t know for sure until later what’s done with disposable income.

“Overall, I can’t say if it’s a good or bad thing, but I can tell you that there are a lot of people benefiting from it, and there are some that are like: ‘Eh, I don’t really see a big difference.’”

Staff writer Ian Gronau can be reached at 741-8272 or igronau@newszap.com

You are encouraged to leave relevant comments but engaging in personal attacks, threats, online bullying or commercial spam will not be allowed. All comments should remain within the bounds of fair play and civility. (You can disagree with others courteously, without being disagreeable.) Feel free to express yourself but keep an open mind toward finding value in what others say. To report abuse or spam, click the X in the upper right corner of the comment box.

Facebook Comment