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Filing your individual 1040 tax return this year carries extra weight due to tax reform, especially for owners of rental property.

Tax reform

All Set to File Your Taxes? 2018 Is a Year Unlike Any Other

  • Austin Bennett
  • Jamey Rappis
  • 3/1/2019

Early in the year most people’s mailboxes start filling up with those dreaded tax forms. As the stack of W2’s, 1099s, and 1098s grows and grows, the angst and questions tend to grow too: “What do all of these forms mean? And will my refund be enough to pay for that long-awaited Hawaiian vacation?”

The answers depend on your personal situation, of course, but the stakes are significantly higher in the 2018 filing season, especially if you are planning for a life event or own rental properties. Much of that has to do with tax reform.

How tax reform may affect your 1040 filing

By now you probably know that President Trump signed the act commonly known as the Tax Cuts and Jobs Act (TCJA) into law at the end of 2017. This is arguably the most significant piece of tax legislation since 1986, and is generically referred to as “tax reform."

It is possible your tax return for 2018 will be easier than it has been in the past (as Congress intended when drafting the legislation). For those with very straightforward tax situations, tax reform has reduced complexity as a result of the doubling of the standard deduction (now $24,000 for a married couple, $12,000 for single taxpayers).

In addition, certain itemized deductions have been eliminated, and the deduction for state and local income taxes and real estate taxes is now limited to $10,000. These two changes alone will result in a substantial reduction in the number of taxpayers who itemize their deductions moving forward, which may save people time when it comes to preparing their taxes.

1040 mindset: a planning opportunity versus a compliance exercise

For people with moderately more complicated tax situations, (e.g., you’re planning to tie the knot, start a business or side-hustle, or pursue a rental or cryptocurrency opportunity), it’s safe to say that your tax situation is more complicated than ever. Those events may leave you wondering:

  • Should I file taxes separately or jointly?
  • Do I structure the business as a sole proprietor?
  • What is Section 199A and what does it mean for me?
  • How do I report income from a cryptocurrency?
While TurboTax provides low cost tax return preparation, it can’t walk you down a path that shows you the tax and financial implications of checking one box over another.

While TurboTax provides low cost tax return preparation, it can’t walk you down a path that shows you the tax and financial implications of checking one box over another. If you’re looking to forecast the financial ramifications of these decisions, I highly encourage you to engage a professional CPA tax advisor. That’s especially true for people who own rental properties, are self-employed, or own a business.

Rental property owners and the 199A deduction

Tax reform included a new deduction for taxpayers and business owners called the Section 199A deduction. The deduction provides a 20 percent income reduction on qualifying business income. But it’s been unclear at what point rental activity rises to the level of a trade or business, a threshold that must be reached to qualify. That is until late January, 2019, when the IRS issued Notice 2019-07.

The IRS notice contained some welcome news for property owners. There is a safe harbor for qualifying rental activity, but unfortunately it can only be used in limited situations. However, you may still be able to take advantage of a “facts and circumstances” analysis to support the deduction outside of the safe harbor. For a more complete explanation, read CLA’s full analysis, IRS Safe Harbor on Section 199A Impacts 2018 Filing for Rental Real Estate.

Deductions, credits, and unwinding errors

There are still opportunities for the “average Joe” (and Jane) to take advantage of all the possible deductions and credits afforded to you under the tax code. For example, we recently had the pleasure of helping a new client unwind the errors he had on his self-prepared tax return. The IRS sent him a notice with a $17,000 assessment that was caused by his input errors. Thankfully, he didn’t owe the IRS — in fact, they owed him more than $800. Our client went from scrambling to make payments to having a good down payment for that Hawaiian vacation.

How we can help

Tax season is a natural time of year to learn how the boxes you check on your 1040 connect to other areas of your financial life. For many individuals, the implications of the tax reform legislation will be the biggest reason they should switch from using consumer tax software to engaging professional guidance.

Starting this relationship can be especially valuable if the advisor you hire has a desire to educate you about the tax return, the impact of the TCJA, and your financial life beyond your Form 1040. CLA exists to create opportunities for our clients, to ride alongside them as they travel through their life’s journey. We want to get to know you and help you. Contact us today.