But
first, we should recall that when it was passed in January 2018, everyone was
singing its praises since everyone’s paycheck suddenly got larger. There was more take home pay for all. Very few people paid attention to the why,
just very happy that it was happening.
But for those who did pay attention, it should be noted that the reason
for the bigger paychecks was not because of less taxes but because of less
withholding, thereby giving the illusion of a tax break. The public was warned by those in the know
that the withholding requirements had been reduced and that smart people should
heed this and increase their withholding if they wish to avoid a surprise tax
bill in 2019. But few people did heed
this which is why, come January of this year, one story that has been prominent
in the news is how shocked so many people are that they are receiving much
lower if any refunds, or even owe tax for the first time in their life. What, they asked, ever happened to the
so-called tax break?
Well,
the tax break was there all along all right but since it was diluted by the
decrease in withholding, few people realized that their tax break was part of
their increased paychecks and that they were spending it already. That is why this year saw a dramatic increase
in the number of people who had reduced refunds and, worse, an increase in
people who discovered they owed.
So many
relish getting a big fat refund. They
seem to think of it as free money. They
don’t seem to get that it is not free money at all; it is their money that the
government has had use of all year and is now returning to you. They take their fat refunds and buy toys with
it, not really getting that withholding is really just a forced savings
account. It’s not a gift, it’s their
money. Ideally, people should be
relishing not big refunds but no refunds, as no refund means that you’ve done
such a good job estimating your tax that you’ve only given Uncle Sam exactly
what is required. Instead of the
government investing the excess and making interest, you can invest the excess
and make interest.
So
that’s the first. The extra money people
were seeing in the checks all throughout 2018 was the tax break and if they
spent it rather than banking it, they discovered this tax season that they were
getting a much lower refund than usual, or even ended up owing.
Second, though you can continue to
claim your minor children (and in some cases adult children) as tax exemptions
(or rather child credits), you can no longer claim yourself or your
spouse.
Third, the 1040 is about half the
length that it has been throughout the years.
This again was to lend the illusion that the form had been
simplified. Actually, not! The two-page traditional form that had been
used all these years had a concise listing of all the sources of income and
deductible expenses that most people would have. For those who had more than the usual, there
were umpteen more forms for them. But
for the average person, the 1040 was all they needed, plus one additional form
for listing extra deductions (called the long form) for those who had legitimate
expenses that exceeded the standard deduction.
Most anyone with a successful business would qualify. For most everyone else, the standard form was
fine.
Here is the problem I discovered
with the new shortened 1040. It did not
produce less paperwork. In fact, it
produced more. All of these income and
expense items that used to be on the 1040 were now cleverly relegated to six
other forms which now had to be filled out in addition to the new 1040. These are the new Schedules 1 thru 6 and it
was difficult to even figure out where they were or what they were used for
without reading the manual pretty closely.
Case in point: Capital Gains and Losses. I was shocked to discover there wasn’t even a
line item on the new 1040 for this. I
was wondering if I had missed something.
For as long as I have been alive, the Republicans have been lobbying at
every election for a reduction (or even elimination) of the capital gains
tax. Now it was no longer even on the
1040. Did I miss something in the
news? Did the Republicans finally succeed? Did the new tax bill eliminate the capital
gains tax?
We wish! No, it was there all right. It was hidden very subtly in the subsection
under Line 6, Total Income where they reference that you must here add Line 22
from Schedule 1. What is Schedule
1? There’s never been a Schedule 1
before, not this kind anyway. So I
discovered that the new Schedule 1 is where all the additional income that is
not included in this abbreviated new 1040 must now be accounted for and Capital
Gains and Losses can be found on Line 13.
There are five other Schedules for other types of additional income and
deductible expenses.
So this year it took me about five
times longer to do my taxes than it usually does because there was a whole new
learning curve, a whole new system to master.
Now that I’ve done it, next year will be a snap; but it wasn’t much fun
this year.
The good news, and it’s very good
news, is that despite the elimination of the personal deductions, the new
standard deduction is considerably higher than before, enough so that for a
great many people the long form is no longer necessary which, for them, does
make filing a good deal simpler. This
also means that for them and most of the rest of us, the net result was a lower
tax, even if it’s a small amount. (i.e.,
for 2017 the deduction for a single tax payer was $6,350; for 2018 it is
$12,000.)
This is the wonderful new world of
taxes and why most of us must continue to use professionals to prepare our
returns though, for the sake of my own education, I have always done my
own.
Afterword:
There is a mystery concerning
capital losses that I have been unsuccessful in solving all these years. The IRS code clearly states that “a MAXIMUM
of $3,000 in capital losses MAY be taken each year.” In other words, it’s an option, not a
requirement. If there’s no benefit to
taking your losses in a given year, you can take them another year. However, four tax lawyers and accountants I
have consulted have told me it’s quite the reverse; that “a MINIMUM of $3,000
in capital losses MUST be taken in a given year.” It’s a requirement, not an option, regardless
of whether there’s a benefit. When I bring it to their attention that the code
does not say that, their response is, “That’s not what it says, but that’s what
it means.” When I ask them to send me
the part of the code that says that, their response is, “We can’t do
that.” This is one of the reasons I’m
studying taxes but, so far, none of the text books I have read have shed any
further light on this topic.
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