JUST BEFORE Santa arrived in 2017, President Trump signed legislation officially titled the Tax Cuts and Jobs Act, which was described by both supporters and opponents as the most comprehensive overhaul of the Internal Revenue Code since the Tax Reform Act of 1986.
The many new rules that are now on the books are mostly prospective, meaning they apply to returns to be filed for calendar years 2018 through 2025. They aren’t retroactive to calendar year 2017.
Media coverage of negotiations between a one-party controlled White House and Congress focused mainly on lower tax brackets. There wasn’t much coverage of some pretty serious changes to the deductions for fees paid for preparation of tax returns and advice on tax planning. In my view, the latest version of tax reform unfairly targets taxpayers compelled to get such help.
Dazed and confused. Every year, filers don’t just need help filling out Form 1040. Once they’re beyond April’s tax-filing deadline, taxpayers frequently need guidance on how to respond to IRS computer-generated assessments of penalties for not submitting returns and payments by their due dates, including interest charges for overdue payments.
Dial up understaffed, underfunded and slow-to-respond IRS employees, and these staffers will insist that taxpayers promptly respond to these notices, which are celebrated for their indecipherable bureaucratese, or become liable for additional penalties and interest. The response of more and more taxpayers: Pay for help available from accountants, lawyers, enrolled agents, financial planners and others (not all of whom, in my experience, are equally talented). This could run to many thousands of dollars.
So how have the Grinches embedded on both ends of Pennsylvania Avenue responded? With the new tax law, they have crafted rules that adversely affect individuals who rely on paid helpers.
Beginning with 2018 tax returns, which will be filed in 2019, revised regulations prevent itemizers who use Form 1040’s Schedule A from deducting fees for preparation of tax returns or for advice on strategies that allow them to trim taxes and sidestep pitfalls.
That’s bad news for taxpayers who need advice on, among other things: contracts for new business ventures; how to enter into or unwind marriages, especially when someone is sufficiently adventurous to remarry or divorce for a second or third time; estate planning; when and how much to withdraw from individual retirement accounts and other tax-deferred retirement plans and who to designate as beneficiaries of these accounts; appraisals to determine how much can be claimed for charitable contributions of artwork and other kinds of property; and, these being the tumultuous times they are, settlements of claims involving sexual harassment or other kinds of misbehavior.
All is not lost. Paid preparers looking to retain their understandably disgruntled clients will want to direct their attention to a rose amidst all the thorns.
The new law left unchanged the old rules that authorize fee splitting for that portion of tax preparation and planning fees that are attributable to Schedule C (profit or loss from business), Schedule E (income from renting vacation homes or other properties, royalties, partnerships and S corporations) or Schedule F (profit or loss from farming).
Clients can continue to use such fees on Schedules C, E or F to offset business, rental or farming income. They’re similarly allowed to claim fees for fighting audits of Schedule C, E or F activities.
An example: Sunny von Earhart is a self-employed writer who receives significant amounts of book royalties and payments for magazine articles. She pays $1,500 in 2019 for preparation of her 2018 return. Sunny’s preparer mentions that her invoice will attribute $900 of the fee to completion of Schedule C.
Sunny responds that they’re navigating terra incognita. Is the IRS willing to accept a paid preparer’s allocation? Yes, provided it’s reasonable, as opposed to frontloaded.
Fast forward to 2020. Sunny files for 2019 and falls into a 30% federal and state bracket. While she can’t claim any deduction on 2019’s Schedule C for $600 of the previous year’s $1,500 total tax-preparation fee, she can claim $900 of it, reducing her federal and state levies by $270.
Another positive outcome: The $900 deduction on Sunny’s Schedule C doesn’t just reduce the amount she shows as net profit, thereby decreasing the amount of income subject to income taxes. It also decreases the amount of her business income subject to self-employment taxes (otherwise known as Social Security taxes for the self-employed). Sunny, like many other freelancers, shells out more for self-employment taxes than for income taxes.
Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Sell or Sweat, Capital Punishment and Late? That’ll Cost You 50%. This article is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.