Lessons Learned from the 2019 Tax Season

November 25, 2019

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The 2017 Tax Cuts and Jobs Act changed the ground rules for both taxpayers and tax practitioners alike. In this podcast, Co-Leader of EisnerAmper’s Personal Wealth Advisors practice, Timothy Speiss, discusses what has surprised him the most, client sentiment, and what 2020 might have in store with respect to tax reform 2.0.  


Transcript

Dave Plaskow: Hello, and welcome to the EisnerAmper podcast series. I'm your host, Dave Plaskow, and with us is Timothy Speiss, co-leader of EisnerAmpers Personal Wealth Group. Tim guides clients on the everyday business and finance issues faced today in the personal wealth and family office sectors. Today we're going to take a look at the 2019 tax season landscape in light of tax reform. Tim, hello, and good morning to you.
Tim Speiss: Good morning, David.

DP: So as we're about to bring the curtain down on the 2019 tax year, as a practitioner, what surprised you the most as a result of tax reform? What's been a real eye-opener?
TS: Well, I would say that we really noted coming into this year with many of our clients who are accustomed, based upon their estimated payment histories, to having lower tax refunds. That's one. We can get into why we think that was. I will tell you that we've been looking at the Treasury collection numbers, the tax receipts all year. Everyone is aware that the original due date, if you did not extend your tax return to October, was April 15 of this year. So revenue started flowing into the government at that time by individuals, and the treasury was noting that generally speaking, refunds were down. The primary reason why that occurred was probably because the rate brackets widened under the 2017 tax legislation. So more income, generally speaking, was being taxed at lower rates. However, there was also some payroll tax withholdings circumstances at the end of 2018 that caused, also depending on their circumstance, overpayment or under-withholdings. So that was two of the reasons. But I'll tell you, we're looking at that now. So I would say that was just one of the matters we described.

The other was the regulation definitions around what's called a specified trade or business. It was brought into the law in 2017. What that did was it created the ability for taxpayers to be able to take a deduction on their tax returns if they had a qualified or specified trade or business. There were not a lot of initial definitions on this. Now I'm going back into 2018, we had more guidance I would say in talking to our colleagues, both here at EisnerAmper, and professionals, tax advisors of the firms. That clearly was one of, can't necessarily say it was the most, but one of the more complicated issues to deal with, especially since you can only get that deduction, a single individual or a married individual if their income was generally below $160,000 or under another test for certain industries under $207,000. It should, if we look at the numbers, benefit many taxpayers because most of the income subject to taxation nationally by individuals is going to be under those thresholds. So we're going to be going back and looking to see what Treasury says about revenue attributable to those specific patterns. I was on the website yesterday for the IRS, and they're starting to populate some statistics. We probably will be able to come back and talk to you again soon on that particular matter.
DP: I would definitely welcome that. What are you hearing from clients this year? Is the vibe different? Do they have more questions than usual, or are they upbeat? Are they concerned? What's the feeling clients regarding tax reform?
TS: Well, as I said, some were disappointed with respect to a refund, but I would tell you that would be more with respect to our clients that were not paying their tax liabilities via the estimated tax payments. I think clients were a little taken aback and, remember, they are not tax professionals, but with respect to the detail and additional information that we needed, especially in the context of these specified trade or business facts that I talked to you about earlier, that's creating an additional 20% deduction. That's number two.

Number three, I would say that the Schedule A was a very different filing form this year because the $10,000 limitation on state and local taxes, which included real estate, individual income tax, and so forth. Again, that was a cap. You can only deduct up to $10,000 of that. In prior years there was no such limitation, but many of our clients in prior years were subject to alternative minimum tax. So, therefore, this year I could also tell you many clients were very pleased that they weren't subject to alternative minimum tax, but it all comes down to the net tax rate, meaning without those deductions and pain in AMT tax compared to a regular income tax this year and comparing the two, that's really what you have to look at. So those were some primary areas. I don't think confusion was the issue. I think understanding how the tax liabilities were calculated: if there were swings in taxable liabilities, why did those swings occur? And then, in some instances, us having to go back and speak with our clients about obtaining more information around certain areas only because of the law changes. And some of this was just not anticipated.
DP: So looking ahead to 2020, is there anything specific that people should be doing now? What should people be working on at this point?
TS: Well, again, and only because many of our audience members are not going to know or be aware of a lot of the technical issues.
DP: Anything to make their lives easier next year, documents that they should be collecting.
TS: If you go back to that specified trade or business matter I went to, we are all, I would say the tax advisory community and taxpayers who are subject to that. By the way, it's intended to be a benefit. It's a 20% reduction or deduction being now fully aware because of what was required and information needed in 2018. Now to be better prepared for 2019 that's part A of that matter. Part B is we've already started to do 2019 undertake pre year-end tax planning for our clients, and unlike a year ago, we now have a tax season, the first tax season under the 2017 tax legislation behind us with all those learnings. So I would say those are two very, very big upsides. Third, we are always trying to make sure that we measure accurately our client's estimated tax liabilities. We're here in the fourth quarter. Many of our clients, we're making fourth quarter estimated tax payments. I think all of us will now be better prepared having gone through the 2018 tax year. We did not have in November of 2018 the benefit of the learnings of the 2017 legislation that will be different this year. So I think for both clients alike and the profession, we'll all be better off to take as much advantage and in a more thought out way than a year ago.
DP: We've heard some whispers about another package of tax cuts for next year for 2020. The director of the National Economic Council, Larry Kudlow, calls it “tax cuts 2.0.” Any thoughts on what this form could take? What are the chances of it passing?
TS: Yes. What he was specifically referring to, if you're citing his interview in September, that is where, and by the way, he has said additional things, but the three salient things he said in September were that keeping certain elements of the 2017 legislation permanent. We have to remember the individual tax provisions under the 2017 legislation are set to sunset in 2025, and then we revert to former law unless they're extended. What Mr. Kudlow was citing was the administration's suggestion to make the current rates under the 2017 tax law for individuals permanent to create a double-standard deduction or to perhaps re-look at that in some way and make it permanent. And that's in reference to the 2017 tax act. And then, additionally, retainthe $10,000 caps on state and local taxes. Remember state and local income taxes, real estate taxes and the sort, keep those permanent. That was really talked about most of the year. That's the most recent narrative Mr. Kudlow has been espousing; there could be more.
DP: Does that include entitlement reform, or is that something separate?
TS: It could. I would say that until we actually see a bill or proposed a bill, we're really not going to know. But Mr. Kudlow went on the record with those statements, and there'll be others. The states are going to weigh in. We don't really have time to get into this, but you're still seeing a big migration of taxpayers leaving high-tax states for lower tax jurisdictions. And think of New York to Florida, think of California. That's indirect contemplation of persons wanting to avoid higher tax rates, states, or status where they can. And we've seen that. We've seen certain of our clients leave New York for lower jurisdictions.
DP: Any final thoughts on the 2019 tax season?
TS: We're encouraging our clients to get started. We have a good amount of time to implement planning for December 31, and then we'll start in earnest again with tax compliance services, preparation and so forth. We are now focused on fourth-quarter estimated tax payments, doing what we can here as we have been all year, but now in the fourth quarter to limit or help reduce our client's tax liabilities to reduce the fourth quarter estimated tax payment. And also if there can be any withholding adjustments undertaken. And we already commenced actually during this past filing season, the filing season ended October 15 we were talking to our clients already about what changes we were advising to have a positive impact, meaning a reduction in their federal and state tax liabilities come April 15 of 2020, so it's already underway. And those are the primary areas we've been talking about.
DP: Okay, Tim, keep up the good work, and, as always, thank you for your insights.
TS: Thank you, David.
DP: And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

About Timothy Speiss

Timothy Speiss is Co-Leader of EisnerAmper's Personal Wealth Advisors Group and Vice President of EisnerAmper Wealth Planning LLC. He chairs our Asia Practice and is a member of the firm’s community service group, EisnerAmper Cares.

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