The tax season just ahead will be “1986 on steroids,” said Beanna Whitlock, a Canyon Lake, Texas-based tax professional and former director of IRS National Public Liaison. “Get some rest, and get ready for new clients!”
Allan Boress, a central Florida-based CPA, said that in addition to dealing with the Tax Cuts and Jobs Act, now is the time to address security matters. “What we’re doing this year to get ready for tax season is a complete reinvention of our security system, from the latest hardware and state-of-the-art software to audio and video surveillance of our office,” he said. “Although I believe we had an excellent security system in place, with triple monitoring and daily update to a secure cloud server, there have been many additional phishing expeditions this year trying to get into our systems.”
“CPAs hold every possible piece of financial and personal data a thief could want,” he observed. “Unfortunately, most CPAs do not take security as seriously as they should, based on the stories relayed at the IRS’s most recent three-day Tax Symposium. These include horror stories of large firms having client data stolen. We are spending heavy five figures to protect our clients from predators.”
Boress has also instituted extra procedures to ensure that no “#MeToo” issues arise. “Neither I nor our other male tax preparers will be allowed to meet with a female client or prospect without being chaperoned by a third party — and they will be under constant audio and video surveillance,” he said.
Boress keeps in touch with clients by email and hard copy to keep them in the tax loop: “Every year, we send a custom-created tax recap for clients about what happened during the year to our tax system and what to expect the following year from Congress. “It includes before-end-of-year recommendations to further lower their taxes this year and next.”
When it comes to reaching out to clients, Vincent O’Brien, a CPA and tax preparer in Lynbrook, N.Y., finds that an initial communication in September, followed by a January reminder, works best: “We like to send out a letter in September asking them if anything has changed, and to let us know if it has. Then in January we send out a memory jogger by email or hard copy, to remind them to start getting ready. We include a very brief list of important things they should get together. It doesn’t overwhelm them, but it’s enough to get the process rolling.”
“Two aspects of the TCJA are forefront this year,” said O’Brien. “For people earning a salary, the question is whether or not they have enough withheld,” he said. “Withholding was reduced for many people as a result of tax reform. Some people in high-tax states may end up owing more tax than was withheld. We’ve been talking about that to our clients during the year.”
“The other issue is the new pass-through deduction,” he said. “Now that the proposed regs are out, clients want to know if they are eligible and what it will really save them.”
Get your clients ready
It’s the tax professional’s job to prepare taxpayers for any surprises that otherwise may be lurking in their tax returns, according to Marty Davidoff, national director of tax controversy for Top 100 Firm Prager Metis.
“A lot of clients are going to be pleasantly or unpleasantly surprised, and our job as professionals is to make sure that they’re not surprised,” he said. “We need to go to major clients and tell them we have to run their taxes and see where they stand so they’re not surprised. Some tax planning can be done, but they’ve taken away so many deductions and opportunities that in the past offered tax planning opportunities. For example, the [Alternative Minimum Tax] used to be a big deal, but it’s not that important a planning issue anymore. The reason is that they changed the computation of regular tax by eliminating most of the deductions, so AMT will become nonexistent for most taxpayers.”
“There are a ton of planning opportunities for the Code Section 199A deduction for pass-through entities,” Davidoff observed. “But the first thing is to get your arms around each client and see what opportunities each one has. A lot of this was done three months ago when the regs came out, but for those whose situation wasn’t fully analyzed then, now is the time,” he said.
“Tax season is going to be a whole lot more complicated this year, because now I have to provide information on my pass-through entities to the shareholders and partners for them to determine if they qualify for the deduction,” he continued. “If they’re over the threshold, the amount they pay in W-2 income is an issue. It has to be reported out to the shareholders so they can report it at the shareholder level.”
“A lot of what we’re doing is to tell clients how much they’ll pay for this year’s taxes compared to last year — what impact does the new law actually have on you,” he concluded. “We’ve already given ballpark figures to a number of clients, but now we’re going to be running the numbers. People want to know, or even if they don’t want to know, you want to tell them so you can be ahead of the curve.”
“That’s what’s on everyone’s mind — ultimately, will they pay more or less as taxpayers,” agreed Tim Steffen, a CPA and director of advanced planning at wealth management firm Baird. “Studies show that the vast majority will pay less in 2018 than in 2017, all things being equal. If you look at the specifics, most people are going to see higher taxable income in 2018 than in 2017 because of the loss of deductions. But with lower tax rates, tax liability should fall at all income levels.”
“But just because liability is falling doesn’t mean a bigger refund this year, especially if people are paying through withholding,” he said. “The withholding tables were adjusted earlier this year, which means many taxpayers have already seen their tax cuts through lower withholding over the course of the year. Many taxpayers will actually see their refund down from what it has been in prior years.”
As a result of changes to deductions and the nearly doubled standard deduction, many taxpayers who itemized in the past will take the standard deduction this year, Steffen said. “So we’re looking at the concept of bunching. That means you accelerate or defer deductible expenses so you can itemize one year and take the standard deduction the next year, and alternate back and forth. If your client will itemize for 2018, bring next year’s charitable gifts into this year, and then next year just take the standard deduction. For people who want to take a large charitable deduction but don’t know yet who they want to give to, vehicles like donor-advised funds are becoming popular. You get the tax benefit today but still control the money — you can’t get the money back, but you control who it goes to.”
In the past, tax advisors told their clients to pay state taxes before the end of the year to get the deduction, but for taxpayers in high-tax states, that advice is no longer valid, he noted. “If they’re above the $10,000 limit, it’s better to delay paying until they file the return if they can, rather than rushing to get it in this year.”
As a result of the November midterm elections, Steffen doesn’t expect any significant tax changes in 2019. “Tax law in 2019 will probably be very similar to this year, so accelerate deductions into this year and defer income to 2019,” he suggested. “This is especially so if the taxpayer is contemplating retiring next year. And from an investment standpoint, if the taxpayer is realizing any capital gains, look to see if there are any losses in their portfolio that might be utilized to offset the gains. Or consider rolling Opportunity Zone Funds.”
It’s also a good idea for taxpayers to use the year end to review some non-tax-related issues, Steffen advised. “They should take a look at their estate documents, and consider who they appointed as beneficiaries, trustees, guardians, executors, etc. See if it all still makes sense.”
