Thursday, February 25, 2021


I recently embarked on my 50th tax filing season.  I have been a paid preparer of 1040s since February of 1972.  

Most people remember their first love. I remember with fondness the first Form 1040 I prepared – which for me is really the same thing.  

My first 1040 was the 1971 model (I can actually tell you the name of the taxpayer).  This was back when a deduction was really worth something and everyone itemized. As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!"  
On my first day on the job, never having prepared a tax return before, not even my own, my boss took me to a desk and gave me a copy of a client’s previous year’s tax return and a briefcase full of papers that constituted the current year’s tax “stuff”.  He told me to “jump in and swim”.  I learned how to prepare income tax returns the very best way possible – by manually preparing income tax returns.  
Back then -
* a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),
* credit card interest, auto loan interest and personal loan interest, as well as our tax preparation fees, were fully deductible,
* "Employee Business Expenses" were allowed as an adjustment to income,
*there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,
* we had never heard of a PIG, PAL, ACRS, MACRS,or MAGI, at least in the context of tax returns,
* and one-half of long-term capital gain just disappeared from the tax return.
For 1971 the starting tax rate was 14% and the top rate was 70%. There was a "Minimum Tax", not yet alternative, and a "Maximum Tax" (the maximum tax on "earned income" was 50%). While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form. The Alternative Minimum Tax did not begin to affect my clients until the 2nd half of the 1990s.  And there was the previously mentioned Income Averaging and 10-Year Averaging.
On Page 1 of the 1971 Form 1040 one would indicate name, address and Social Security numbers of the filer(s). In the case of a return for a married couple the names were listed as “Richard and Mary Taxpayer” on one line instead of a separate line for the name of each spouse. The filing status was checked and exemptions were claimed. The taxpayer and spouse could each claim an additional exemption for being 65 or over and blind. The names, but not Social Security numbers, of dependent children were listed, with no indication of whether they “lived with you” or “did not live with you”. The names, but again not Social Security numbers, of “other” dependents were listed on Page 2 of the 1040.
Income was reported on Lines 12 through 18 on Page 1, with lines for wages, dividends (no designation of “qualified”), interest (taxable only – no reporting of tax-exempt interest), and “income other than wages, dividends and interest”, the sub-total, total “adjustments to income” and Adjusted Gross Income. The line for dividends included (a) for gross dividends and (b) for an exclusion amount. If gross dividends and/or total interest exceeded $100 one would have to complete and attach Schedule B.
The net tax liability was reported on Lines 19 through 23. Federal Income Tax withheld, Estimated Tax Payments, and “Other payments” were deducted and a balance due or refund was indicated.  Line 31 of the Form 1040, and not Schedule B, was where the taxpayer was asked about foreign accounts.
Part I of Page 2 of the 1040 was where other dependents were listed, along with relationship, months live in taxpayer’s home, did dependent have income of $675 or more, amount taxpayer furnished toward support, and amount furnished by all others, including the dependent.
Specific items of income, adjustments to income, credits, other taxes, other payments, and the actual Tax Computation were reported on Lines 34 through 64 in Parts II through VII.
Social Security, Railroad Retirement, and Unemployment benefits were totally exempt from federal income tax. One could use the “3-year” rule for recovering employee contributions to determine the taxable portion of pensions and annuities. This was calculated on Part I of Schedule E.
Adjustments to income included –
·         Sick pay,
·         Moving expense.
·         Employee business expense, and
·         Payments as a self-employed person to a retirement plan, etc.
The only credits indicated on the 1040 were –
·         Retirement income credit,
·         Investment credit, and
·         Foreign tax credit.
The personal exemption amount was $675. Tax could be calculated by “using Tax Rate Schedule X, Y or Z, or if applicable, the alternative tax from Schedule D, income averaging from Schedule G, or maximum tax from Form 4726”. Other taxes included a line for “Minimum tax”, not yet alternative.
On Schedule A –
·         Medical and dental expenses were reduced by 3% of Adjusted Gross Income (this was the only item on the Form 1040 that was reduced based on AGI).
·         Taxes included state and local gasoline tax (from gas tax tables), general sales tax (from sales tax tables) and (not or) state and local income tax, with an additional deduction allowed for sales tax paid on “major purchases”.
·         Contributions were deductible pretty much as they are now, except there was no strict requirement for documentation.
·         Interest expense included not only home mortgage interest (fully deductible – not limited to interest on “acquisition debt” and no principle restrictions) but also interest on installment purchases, credit cards, and other “personal” interest.
·         Miscellaneous deductions were not reduced by a % of AGI; certain employee business expense, as mentioned earlier, were deductible as an “above-the-line” adjustment to income.
Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in AGI. So, if net long-term capital gain (or net combined long-term and short-term gain if smaller) was $10,000, only $5,000 was reported as income on Page 2 of Form 1040. The maximum net capital loss deduction was $1,000.
The 1971 standard deduction was $1,050 for both a single person and a married couple. The standard deduction was originally 10% of AGI up to a maximum of $1,000. It wasn’t until 1975 that the standard deduction for married was more than that for single.
There were no computers in those days. During my first few years we did not even have a copy machine in the office. Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House.  As most of you know, I still prepare all of my federal income tax returns manually.
As I started out in the tax preparation business the matching of 1099s to 1040s had just begun. I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.
During my early years you were not required to list the Social Security number for dependents claimed on your return. One year a married client, let's call him John and his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George. The college student who prepared the return that year (not me) listed 4 dependents - John, Mary, Paul and George. The client received the refund requested on the return without question.
The next year John came in and stayed while I prepared the return. I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George! The John and Mary he had listed on the sheet the previous year was apparently he and his wife. It appears that the student who had prepared the earlier return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.
At the IRS Tax Forum several years back, it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents mysteriously disappeared from tax returns.
Of course, in the "good old days" we never filed an extension. We finished all the returns on April 15th - even if we had to stay in the office until the wee hours of the morning, with the client present, to do so!  I often made an 11:30 PM run to the Jersey City main Post Office on April 15th
So, you can see there have been a lot of changes to tax law, and tax preparation, since my first 1040.  And there will be more changes going forward.  It appears the only constant in tax law is change.  Today’s tax law is certainly much more complicated and convoluted than the 1917 US Tax Code.
One thing has not changed.  The basic challenge for the tax professional is still the same today as it was in 1971– getting all the necessary information from the client to properly prepare the return. 
In my opinion some 1971 tax law is better than 2020 tax law and some 2020 tax law is better than 1971 tax law.  But that is a topic for another post. 


Monday, February 1, 2021



And so, the 2021 “tax season” officially begins.  This will be my 50th season.

Now – what you have been waiting a year for - 


On the first day of tax season my client gave to me a Closing Statement for the purchase of a home.

On the second day of tax season my client gave to me 2 Economic Impact Payment notices.

On the third day of tax season my client gave to me 3 mortgage statements (without, of course, any analysis of how much of the mortgage interest reported represents interest on acquisition debt).

On the fourth day of tax season my client gave to me 4 W-2s.

On the fifth day of tax season my client gave to me 5 Salvation Army receipts.

On the sixth day of tax season my client gave to me 6 1099-DIVs.

On the seventh day of tax season my client gave to me 7 cancelled checks.

On the eighth day of tax season my client gave to me 8 useless items.

On the ninth day of tax season my client gave to me 9 medical bills.

On the tenth day of tax season my client gave to me 10 stock sale confirms.

On the eleventh day of tax season my client gave to me 11 employee business expenses (despite being no longer deductible).

On the twelfth day of tax season my client got from me a finished tax return, 11 employee business expenses, 10 stock sale confirms, 9 medical bills, 8 useless items, 7 cancelled checks, 6 1099-DIVs, 5 Salvation Army receipts, 4 W-2s, 3 mortgage statements, 2 Economic Impact Payment notices, and a Closing Statement for the purchase of a home.

And, of course, on the thirteenth day of tax season the client gave to me a corrected Consolidated 1099 from Wells Fargo Advisors!


Monday, January 18, 2021


I am always seeing fancy looking organizers on home improvement shows and in the aisles at STAPLES.  It appears that some are rather expensive.

I get all my business and personal organizers absolutely free!

I have found that the various containers that food and household products come in are perfect organizers for holding different sized paper and binder clips, various sizes of sticky pads and smaller lined paper pads, stamps, pens and pencils, erasers, and other office and household supplies.

For one, there is the plastic containers that many “tv dinners” come in (the aluminum ones are no good).  And the brown container that holds three crème-filled cupcakes in a package.  They provide multiple sections for organizing clips.

The green, blue, and black containers that hold the Swiffer wet pads, or the generic alternative, come in several sizes and have many uses in the kitchen, bedroom, and office.

The round plastic containers that contain potato or macaroni salad from the supermarket or sandwich shops like “Blimpie” are also good for holding small supplies.

I even make use of the metal Altoids containers.

Not only am I saving money, but I am recycling as well!


Last week’s post on the NJ-NATP state tax seminar mentioned New Jersey’s new “BAIT” deduction and credit. 

I discussed my thoughts on this new “scam” (my opinion) in “’Bait’ and Switch” at THE WANDERING TAX PRO.


Monday, January 11, 2021



For the first time in many, many years I was not on the road before sunrise heading to what used to be the Woodbridge Hilton in Iselin, New Jersey on the second Saturday in January (this past Saturday) for the truly “Famous NJ State Tax Seminar”.  I do believe I have only missed 2 of these seminars since they began, both times due to snow.  
And it was the only “Famous NJ State Tax Seminar” that I have “attended” wearing nothing but a bathrobe.
This was the first, and hopefully last, year that this “must-attend” seminar for tax pros who prepare NJ state income, corporate, payroll, sales, estate, or inheritance tax returns and/or NJ property tax relief applications was offered “virtually”.
Let me begin with my usual “disclaimer”.  My main interest in this seminar, or any CPE offering, is individual income tax return issues – here the NJ-1040 and IT-201 and IT-203, and the NJ property tax relief programs.  I have only a basic interest in business or sales tax issues and none whatsoever in estate and inheritance tax issues – and often pay little attention to discussions of these topics at any offering.  However, I do feel these topics should be covered in this seminar, as they are important for many NJ tax preparers.
I most definitely prefer live CPE events to online “webinars”.  I like the ability for direct questions and comments from the audience during presentations.  But I had no problems “attending” this webinar under the circumstances.  It went relatively smoothly, despite a few technical “hiccups” resulting mostly from the presenters’ unfamiliarity to the process being used.
This year’s event was a bit shorter than past years – ending at 2:50 instead of 4:50. There was a shorter lunch period and there was no “peripheral” session, such as redundant estate and inheritance tax overviewss in past years.  I have always said this seminar should be limited specifically to New Jersey and New York state tax, and property tax relief program, updates and changes.
One interesting new item, due to the “virtual” nature of the presentation.  There was actually a “commercial” that ran several times during the day for the event sponsor.  This was in lieu of the vendor tables and presentations at past "in-person" offerings.  The presentations were also interrupted occasionally for audience “polls”, which, I believe, was necessary to verify the actual participation in the event by “attendees” for purposes of issuing CPE credit.
The morning involved NJ taxes and the sessions were presented by NJ Division of Taxation’s “Taxation University”, which conducts tax seminars and workshops for tax professionals, tax volunteers and small businesses.  {As an aside, Alexis Reid, still with NJDOT but no longer a member of TU “faculty”, was missed on the “podium” – she continues to be a great ongoing help to me personally and other NJ-NATP members.}  The afternoon was devoted to Kathryn Keane’s annual NY State Update, although she did not touch on federal changes this year as she has done in the past (apparently because NATP prohibits state chapters from discussing federal issues on webinars). 
As is the custom, the program begins, after introductory remarks by chapter Board members, with a brief “keynote” presentation by the Director of NJDOT – this year still “Acting” (no idea why) Director John Ficara.  Saturday’s keynote was a bit more worthwhile than past years (I have generally found this presentation a waste of time), due to the discussion of the Division’s response to the pandemic.  Unlike the IRS, NJDOT did not totally shut down for over 3 months, and as a result the NJ returns of my clients, and their requested refunds, were relatively promptly processed.  Of course, there is obviously no comparison between the volume handled by the IRS and that handled by NJDOT.
Individual taxes were discussed first.  As I always say the value of update seminars like this depends on the extent of tax law changes and developments.  There was not much new for any NJ tax for 2020.  I outlined the changes to the 2020 NJ-1040 in my post “What’s New for the 2020 New Jersey State Tax Return” at THE WANDERING TAX PRO. 
The individual tax presentation began by reminding us that no COVID-related relief payment is reported as taxable income on the NJ-1040, or NJ-1040NR.  This includes the stimulus payment, supplemental unemployment benefits (NJ has never taxed unemployment benefits) or any “EBT” (Electronics Benefits Transfer) welfare payments.
One thing worth repeating here – while the final phase-in of the increase in the Pension/Retirement Income Exclusion is in effect for 2020, the “NJ Gross Income” threshold for claiming this exclusion remains at $100,000, regardless of filing status.  As I said in my TWTP post this means as little of $1.00 in additional income can cause a NJ taxpayer to pay hundreds or more in NJ state income tax.”  Clearly the NJ state legislature is at fault here.
And a reminder – while the federal government no longer penalizes a taxpayer for not having “adequate” health insurance coverage for all members of the household, NJ still requires coverage and charges a penalty that is assessed on the NJ-1040.
As in past years, refunds requested on 2020 NJ-1040 and NJ-1040NR returns will not be issued until March 1st, regardless of when or how the return was filed.
The biggest issue in the individual category concerned the state tax treatment of employee “telecommuting” required by the pandemic.  NJ, and NY (as we learned in the afternoon), has not made any change to its policy of taxing employees who occasionally or temporarily “work at home”.  A NJ employee working for a company located in New York will not be allowed to “allocate” days worked at home as days worked outside of New York State for purposes of calculating non-resident NY state taxable wages.  Days worked at home in New Jersey are considered days worked in New York State.  As Kathryn explained in her presentation, NY has very strict and specific rules regarding employee out-of-state home offices.
The business tax presentation that followed pointed out that telecommuting does not create a “nexus” for business taxes.
There was one item in the individual presentation that was truly new to me, and I expect to most if not all of the “attendees”.  When I downloaded and skimmed through the “handout” material for the seminar on Friday I noticed a reference to an “Income Tax Rebate” (nothing to do with the Homestead Rebate) in a slide.  I had never heard about this rebate before.  There is nothing I saw in the 2020 Instructions for the NJ-1040 about this rebate nor anything anywhere on the NJDOT website.  And I could not even find anything via a Google search.
During the presentations “attendees” could enter questions in a special box that were answered either in this box or addressed by the speaker at the end of their presentation.  I typed in a request for more detailed information on the income tax rebate, but my request was totally ignored.  Perhaps I did not enter the question properly.
It appears that this rebate is not part of the actual NJ-1040 filing, although the amount is based on a taxpayer's NJ state tax liability.  And it appears that the issuance of any rebate for 2020 depends on the fiscal year 2021 budget that will be passed by the NJ state legislature at the end of June (much as we have to wait each year for the budget to pass to find out if Property Tax Reimbursements - “senior freeze” payments – are further limited).  The rebates, if allowed by the budget, will be issued separately from NJ-1040 refunds and not until after June 2021.
If any of you reading this post know of any link to specific information and details explaining this new rebate please email me at with “NJ Income Tax Rebate” in the subject line.
The business tax presentation reminded us that ALL 2020 NJ-W-3 forms and corresponding state copies of W-2s and ALL state copies of 2020 Form 1099s MUST be submitted electronically.   This can be done free of charge on the NJDOT website.
The main discussion topic in this section was the new “Business Alternative Income Tax” (BAIT) for NJ pass-through entities (i.e partnerships, sub-S corporations and LLCs filing as partnerships or S-corps).  This was first mentioned by AD Ficara and also briefly discussed in the individual presentation, as this payment is claimed as a withholding credit on the NJ-1040.
There seemed to be confusion regarding the federal tax treatment/benefit of NJ’s BAIT.  The TU speakers knew all the details on how BAIT is elected and treated under NJ state tax law, but could not properly address the federal implications. 
The BAIT was clearly another attempt by NJ to “work-around” the $10,000 federal SALT deduction limit to help NJ residents legally cheat on their federal return.  Based on what we are hearing from the IRS the BAIT scam is so far successful.  Here is how the BAIT election has been explained in an item I found online (not the NJDPT website) -
The significance of this election is that the business taxes paid by an eligible entity can be deducted in determining federal income that passes-through to the owners, resulting in less federal tax paid by the owners on their share of the PTE income.”    
There has been no change to the rules for the NJ Property Tax Reimbursement (aka “Senior Freeze”) program, other than the increase of the income threshold for 2020 to $92,969.  The deadline for filing the 2019 PTR application had been extended to February 1, 2021.  Those who have not yet filed a 2019 application can still do so.  The deadline for filing the 2020 PTR application is November 1, 2021.
The was no discussion of the NJ Homestead Benefit.  A slide in the Property Tax Relief presentation stated “No information available at this time.”
Before the lunch break there was a new presentation – a “COVID-19 Panel”.  Three high-level NJDOT representatives fielded questions on how the pandemic has affected the processing of returns, applications, audits, and collection activity, presented to them by panel mediator, and NJ-NATP’s old friend, Jake Foy.  It truly was good to see Jake participating in this event again, although we could not actually “see” him.  While we could hear Jake’s familiar voice, some glitch in the system did not allow him to appear on screen.
A panel of this type is something that should have been made a regular feature of this seminar years ago.  I hope it continues in future seminars going forward – with perhaps some different types of panels (such as a panel of tax professionals).
After lunch we learned there was really not much new for NY state income tax returns either.  The only real item of interest was the fact that NY State has “decoupled” from – does not accept the tax law enacted by – the federal CARES Act, with a few exceptions.  There is a new Form IT-558 to identify required adjustments on the IT-201 or IT-203 resulting from the “decoupling”. 
New York does accept the 3-year reporting of COVID-related qualified pension account withdrawals.  New York does not allow the “above-the-line” deduction of up to $300 for charitable contributions made by taxpayers who do not itemize.  But remember, if you do not itemize on the federal return you may still be able to itemize on the NY state return.  New York does allow the increased AGI limitation on itemized deductions for charitable contributions.  
Once again NJ-NATP did a good job with this event.  New NJ-NATP Board President Josh Mellum and Seminar Chair Ethan Hundley deserve kudos.  Being virtual apparently did not hurt “attendance”.  It was mentioned that there were 164 participants in this year’s event vs 163 in attendance at last year’s in-person seminar. 
Next year’s “Famous NJ State Tax Seminar” is scheduled for January 8, 2022.  Hopefully I will be on the road to Iselin NJ, or somewhere in NJ, next January 8th.

Monday, January 4, 2021


I’m baaaaaaack!

THE TAX PROFESSIONAL – a blog of advice, information, resources, and commentary on preparing 1040s and the tax preparation industry – is back.
The NJ chapter of NATP’s annual “Famous NJ State Tax Seminar” is virtual this year.
It will be held at the usual time – Saturday January 9th from 8AM to 3PM – only online. 
I have been attending this annual seminar – which provides updates on New Jersey and New York state income, payroll and taxes and the NJ property tax relief programs - for as long as it has been offered.  I have always maintained that this is a “must attend” event for anyone who prepares NJ state tax returns for individuals and/or businesses.
All materials for the seminar will be provided electronically via a secure link sent to registrants up to 3 days in advance of the event.  A copy of the materials will also be available for download during the event.  Registrants will earn 6 CPE credits.
The cost is $95 for members and $145 for non-members.  Go here to register.
I will miss seeing my NJNATP friends and colleagues – and look forward to NJNATP, and national NATP, returning to in-person seminars and workshops hopefully later this year.
+ I invite you to read my “The Year In Taxes 2020” post at THE WANDERING TAX PRO and let me know if I forgot anything.
+ Tax pro Joe Kristen has returned to blogging with the “EideBailley Tax News and Views Blog”.  Similar to my “What’s the Buzz” at “The Wandering Tax Pro”, it is a week-day daily blog of online posts and articles to “help you stay informed with what's happening in the tax world. Whether it's a new tax law tacked on to a spending bill, a new court case that reminds us of venerable tax lessons, or a surprising approach by states to tax non-residents, it's fair game.”  Check it out and subscribe.
+ Did you know that the National Association of Tax Professionals now has a blog.  Go here to check it out.
+ And one more tax blog you may find helpful – “Current Federal Tax Developments”.
Over a dozen years ago I sat down and compiled a “handbook” or “manual” for my 1040 clients.  It provided details on the policies and practices of my firm, identified my responsibilities and the responsibilities of the client, listed what I would need each year to properly prepare the client’s tax returns, and explained how long the client should save the return and supporting records.  I sent a copy to all my existing clients at the time and gave it to each new client going forward at the beginning of the “engagement”.
I recently revised and updated this handbook and offer “reprint rights” of it to you, my fellow tax professionals, for use in your practice.
You can use the 28 pages of text as intended – a free client handbook for current and new clients – or you can use various components of the text separately in free client newsletters or as free client handouts.   None of the contents and components of the handbook may be used in any product or publication for sale to clients or the public for a fee without written permission from me.
The handbook includes -
·         ABOUT ME
·         MY FEES
·         WHAT I DO NOT DO
·         DEDUCTIONS
The DEDUCTION section contains charts of Adjustments to Income, Itemized Deductions, Rental Expenses, Business Expenses.  And THE NEW MORTGAGE INTEREST DEDUCTION appendix includes worksheets for keeping separate track of acquisition debt and home equity debt with a detailed example.
The text is sent as a word doc email attachment so you can customize part – such as composing the section that identifies you, your firm and any other preparers in the firm and customizing the explanation of services, practices and policies to your individual tax practice.  It is written as a one-person practice, so the “I” and “me” can be changed to “we” and “us” as applicable.  And it is written as a NJ tax preparer, so you can add your applicable state tax requirements under WHAT I NEED TO PREPARE YOUR TAX RETURNS.
A signed reprint rights license agreement will be sent via postal mail.
BTW – a thank you to Marc Standig EA, my former editor at “NJ Taxing Times” and long-time Board member and volunteer with the NJ chapter of NATP for his help in reviewing and “proofing” this handbook.
The cost of the reprint rights license for this handbook is only $49.95.  Members of the National Association of Tax Professionals receive a 20% - or $10.00 – discount.  Please provide your membership number when ordering.
Send your check or money order for $49.95 or $39.95, payable to “Taxes and Accounting, Inc”, and your email address and postal address to –

Wednesday, April 25, 2018


Those were the days, my friend.

For about the first third of my tenure as a professional tax preparer we would tell our clients that if they itemized Uncle Sam would reimburse them for a substantial percentage of our fee – up to 50%.  This was obviously before the introduction of the 2% of AGI exclusion for Miscellaneous Expenses. 

Even after the exclusion became law, many clients could still be reimbursed by the US government for a part of our fee.

Unfortunately, thanks to the GOP Tax Act, I can no longer say that.  As you know, all Miscellaneous Expenses subject to the 2% of AGI exclusion are no longer deductible.  This includes the cost of preparing your tax returns or defending yourself in an IRS or state audit.

And back in “the day” we could also “pull a rabbit out of a hat” and save clients literally thousands of dollars in federal income taxes by using Income Averaging or 10-Year Averaging.  Unfortunately, these two tax benefits were put to death via the Tax Reform Act of 1986.  

Yet it seems that each year at least one long-time client asks me about income averaging when faced with a big jump in income and a corresponding big tax bill.  And, remembering that for one year only decades ago the IRS permitted itemizers to deduct their sewer bill as a tax, each year two or three clients continue to give me their sewer bills along with their tax stuff. 

It seems that while taxpayers can often forget to report income, they never forget a deduction or tax saving trick!

Oh well.  

BTW - did you see my "review" of the 2018 tax filing season?  Click here.


Thursday, February 8, 2018


I’m back again.  I just want to take this opportunity to clarify some of the points I had intended to make in my ACCOUNTING TODAY commentary “Some Truths About the GOP Tax Law”.

Under tax law prior to the passing of the Tax Cuts and Jobs Act the 2018 personal exemption was $4,150.  For a person or couple in the 15% tax bracket this represented a reduction of tax liability of $623.  For a taxpayer in the 25% bracket this represented a reduction of tax liability of $1,038.  And so on.

For a dependent child under age 17 the Child Tax Credit, previously $1,000, is increased to $2,000.  The additional $1,000 credit is presumably to make up for the loss of the tax savings from the elimination of the personal exemption deduction.  A taxpayer with a “qualifying” child in the 15% bracket comes out ahead.  But a taxpayer in the 25% bracket does not.

The GOP Tax Act does increase the AGI threshold for claiming the Child Tax Credit – so it will be available to many more taxpayers than it was under prior law.  It is true that many married couples in the 25% tax bracket received a reduced Child Tax Credit or no credit at all under “old” law.  In these situations, the increased credit more than makes up for the loss of the dependency deduction.

But taxpayers can only claim a $500 credit for a dependent child age 17 or older, in many cases college students.  A taxpayer in the 10% bracket would have saved $415 for such a dependent under prior law, so that person benefits.   But taxpayers in all other tax brackets end up with increased net taxable income.  If we look at the new tax rates – 12% of $4,150 would be just about $500, but 22% of $4,150 is $913, and so on.  So, under the GOP Tax Act dependents under age 17 have more value than those over age 16 as well as non-child dependents such as elderly parents.

The elimination of the dependency deduction also adversely affects taxpayers who had been able to itemize in the past but will no longer itemize for 2018 through 2025 due to the increased Standard Deduction amount.  A married couple with no dependents who would have been able to claim $26,000 in itemized deductions and $8,300 in personal exemptions will be taxed on $10,300 more in net taxable income if their itemized deductions are reduced to below $24,000 by the $10,000 limit on the deduction for taxes and the elimination of miscellaneous deductions subject to the 2% of AGI exclusion.  Granted the tax rates are lower, but the increase in net taxable income can substantially reduce or eliminate the benefit of the lower rates.  A taxpayer in the 15% marginal bracket under “old” law could be in the 22% bracket under the GOP Tax Act.

And if I may add an observation on the corporate tax rate change - it appears that the new 21% corporate tax rate is a flat rate (correct me if I am wrong), and replaces the previous progressive scale.  So smaller corporations who had previously paid 15% in federal income tax on corporate profits will get a tax increase and now pay 6% more in tax.  

The bottom line is that the GOP Tax Act is not a “massive” tax cut for the middle class.  Whether or not a taxpayer will benefit from the Act, or actually pay more federal income tax, depends on their individual facts and circumstances.  As I said at the end of my AT commentary – “In reacting and responding to the changes made by the Tax Cuts and Jobs Act, one must look carefully at what the new law actually says and not rely on the “party” line that is being presented in the press.”