The tax reform that kicked in this year changed everything from standard deductions to the taxing of business entities. And the tax-preparation profession freely admits that it is struggling to maintain mastery over the tax code.
For example, reform was supposed to simplify taxes—starting with a tax -form reduced in both size and complexity. It didn’t work, tax experts warn. “The ‘postcard’ is not a postcard but rather a new set of forms to file [that] add complexity and additional time to tax preparation, as well as potentially added costs,” said Scott Kadrlik a CPA and managing partner at Meuwissen, Flygare, Kadrlik & Associates in Eden Prairie, Minn.
Kadrlik says the most confusing aspect of tax reform for a typical wealthy client is his or her loss of miscellaneous itemized deductions, “which mainly includes investment management fees and tax-preparation services.” The question for most is whether the reduction in [tax] rates offsets the loss of deductions. “The standard deduction was increased,” Kadrlik said, “but in most cases just replaces the personal exemptions and old standard deduction.”
Many wealthy individuals assume they’re going to owe more taxes now that the law is in place, especially since the state and local property tax deduction tops out at $10,000. “In fact, some wealthy individuals may owe less, some will owe more,” said Gail Rosen, CPA and shareholder in charge of the Somerset County, N.J., office of WilkinGuttenplan. “It’s not a one-size-fits-all tax reform.”
“Many high-wealth individuals hold investments in non-U.S. corporate entities,” added Katelynn Minott, a CPA and managing partner with Bright!Tax/The Minott Group. “Historically, these individuals were able to defer income generated within the entities until they actually received income, but now [the Global Intangible Low-Taxed Income provision of the tax reform] has changed the possibility for deferral. The transition tax generated as part of the reform was intended to apply to businesses with international subsidiaries, but it’s also affecting U.S.-citizen owners of offshore business interests.”
Taxpayers must make sure their preparer can get the new job done—and the wealthier the taxpayer, the more involved and important the questions. Here are some good questions for those tax preparers:
How do you see the new tax law affecting our situation? “This way you can gauge how well they know the new tax law,” Rosen said.
Can you show me how my 2017 income would have been taxed in 2018? “Even though the alternative minimum tax has been modified, it may still apply to wealthy clients and is still an issue,” Kadrlik added.
What strategy will we use to reduce my tax liability to the extent possible? “How does our relationship extend beyond tax preparation?” Minott asked. “Do you have experience working with clients with similar situations to mine?”
Do I qualify for any new tax benefits? High-net-worth individuals “who own businesses or rental properties will need an analysis done this year on certain aspects of the new tax law,” Rosen noted.