Tax Season Takeaways

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The April 15th deadline passed nearly two months ago, and I’ve finally had some time to reflect on the most unique tax season of my career. Due to legislation enacted by the Tax Cuts and Jobs Act (TCJA), many of my clients were surprised by the outcome of filing their tax returns. Many received refunds that were less than they were previously accustomed to, whereas others received refunds for the first time in years. Here are my five most prominent takeaways from the 2019 tax season:

 

1.       There is a lack of understanding of how a tax return works.      

When you break down a tax return to its’ simplest form, it is as follows:

Taxable income x tax rate=Tax-Tax Withheld (or paid in through estimates) = Refund or payment due.

In 2018, due to the enactment of the TCJA, the tax brackets were lowered. To offset the lowering of the tax brackets, tax withholding tables were adjusted which led to less money withheld from paychecks. For example, many of my clients ended up with their tax liability going down by $500-$1,000 due to the savings from the TCJA, but had their withholding go down by $2,000. This left taxpayers with the feeling of being worse off due to the TCJA when that wasn’t the case.

2.       Many taxpayers do not look at their paystubs

I’d estimate about 20% of my clients noticed that their tax withholdings had changed. Many clients had withholdings decrease by $5,000 to $10,000 and hadn’t noticed the extra money received during the year.

3.       Taxpayers with kids walked away happy

The child tax credit was changed from $1,000 to $2,000 under the TCJA. The threshold to receive the full credit was also raised dramatically. Many taxpayers who never received the $1,000 for each of their children suddenly now received $2,000 per child.

4.       State and Local Tax Restrictions were a killer

With the passing of TCJA, taxpayers were limited to a $10,000 write-off for state and local taxes, which includes property taxes and taxes paid to your state, if applicable. For taxpayers living in high tax areas, such as here in California, this led to some taxpayers paying more than they would have before TCJA.

5.       Better planning is necessary going forward

With the TCJA, many businesses now need year-end planning to keep their income under the threshold to receive the qualified business deduction. I am also recommending many of my clients come in for planning during the year to ensure their withholdings are corrected from the previous year.