Last Tax Season Was a Mess. Now’s Time to Prepare for This One.

If you didn’t change the tax withholding in your paycheck, you still have time to avoid another unpleasant surprise — or even a fine.

 
 

The first tax season under the Republican-sponsored overhaul brought an odd combination of pleasant and unpleasant surprises: lower tax burdens, but also lower refunds — and, for some, an unexpected bill.

Anyone who didn’t take a proactive approach after getting a big tax bill last time around could end up in that situation again, only worse: That filer is more likely to have to pay a penalty.

For 2019, taxpayers who didn’t generally withhold at least 90 percent of their liability from their paychecks may be required to pay a fine. That threshold is back up from 80 percent, where it was set last year as everyone adjusted to the new rules.

If you didn’t change your withholding by filling out a new W-4 form with your employer, there are still steps you can take to try to avoid the extra charge.

If a withholding calculator — like the one on the Internal Revenue Service’s website — shows you’re significantly short, you have options. There may be time to have an extra amount withheld from your final paycheck to get you over the threshold, although that will require filling out a W-4 now and another later to reverse that change. Or you can make what’s called an estimated tax payment directly to the I.R.S.

You’ll also want to think about how to handle the rest of the tax balance.

“You can start planning for that now by setting aside money in savings accounts or planning ahead for an installment agreement with the I.R.S. so you can pay over a period of time,” said Nathan Rigney, lead tax research analyst at H&R Block’s Tax Institute.

Most households did pay a bit less because of the overhaul: Individuals’ total tax liability dropped nearly 5.8 percent, or $70 billion, according to I.R.S. data on tax returns filed through July.

But it didn’t feel that way for some taxpayers. The number of refunds issued hardly budged — they were down 0.3 percent — but refunds for many were smaller. Refunds for those who earned between $100,000 and $250,000, for example, dropped by about 11 percent, according to the I.R.S.

Many people were surprised to learn that they owed the government money even if their situation hadn’t changed.

 
Why? After the law went into effect, the government told employers how to tweak the amount of tax withheld from workers’ paychecks. It mostly suggested decreases, and, in some cases, filers didn’t have enough withheld. (Over all, however, the average refund amount declined only 1.3 percent last year.)

“It’s safe to say taxpayers were caught off guard by the impact of those changes,” said Brian Ellenbecker, a certified financial planner and senior vice president at Baird, a financial services firm in Milwaukee.

The new law simplified the tax lives of many households because it doubled the standard deduction. About 90 percent of taxpayers used the standard deduction on their 2018 tax return, the I.R.S. said, up sharply from 70 percent in 2017.

But that doesn’t mean there aren’t some simple strategies to consider to lower your tax bill, and there’s still time left in the year to put them to work.

For 2019, the standard deductions are up a little, to $24,400 for married couples filing jointly and $12,200 for single filers. For most people, that will do nicely.

But if your itemized deductions — including mortgage interest, state and local taxes (known as SALT, now capped at $10,000), and charitable contributions — are just shy of topping the standard amount, you might think about bunching certain deductions into alternating years.

Consider a family that gives $5,000 to charity at the end of every year. Instead of making that donation this month, it could do so in January, then make another as usual next December. The family would then have $10,000 in itemized deductions for the 2020 tax year.

 
The same logic can be applied to certain medical expenses. In 2019, you can deduct the portion of your expenses that exceed 10 percent of your adjusted gross income (if you itemize). So if you plan to have elective surgery, for example, it may make sense to consider the timing.

“Dental bills,” said Larry Pon, a certified public accountant in Redwood City, Calif. “Those are big ones.”

There’s a way for some older taxpayers to get a break using charitable contributions even if they don’t itemize. Those over 70½ can make what’s known as qualified charitable distributions — a direct donation from an individual retirement account to an eligible charity. The benefits are twofold: Donations, up to $100,000 annually, are not included in their taxable income but count toward the prescribed amount they must take out each year (also known as a required minimum distribution).

“This opportunity was a good deal before tax reform, and now it can be even more relevant and useful,” said Joe Musumeci, a certified public accountant with Rowles & Company in Baltimore.

There aren’t many pay periods left, but workers can reduce their taxable income by contributing more to their employer-sponsored retirement account, such as a 401(k), before the end of the year. Contribution limits to such accounts are $19,000 in 2019, or $25,000 if you’re 50 or older.

And there’s still plenty of time to contribute to I.R.A.s. Contributions to traditional I.R.A.s may also provide a tax deduction, as long as you meet the income limits and other rules. For 2019, contributions to traditional and Roth I.R.A.s can be made until the April 15, 2020, tax deadline. (Just be sure to tell your provider that the contribution is for the 2019 tax year.)

The same goes for self-employed people contributing to a SEP I.R.A., which allows contributions up to 25 percent of compensation up to $56,000 for 2019, said Lisa Greene-Lewis, a certified public accountant at TurboTax.

If you plan on contributing to a 529 college savings plan, you probably want to do so before Dec. 31.

That’s the deadline to qualify for many of the state tax breaks offered by more than 30 of these plans. (Some states’ deadlines stretch into the new year.) Contributions are made with money that has already been taxed, and it’s withdrawn free of capital gains and income taxes as long as it pays for qualified expenses.

It won’t exactly cut your tax bill, but it would be a missed opportunity to not use money you’ve put into a health care flexible spending account or a dependent care account. Be sure to check your balances and put that pretax money to use.

Plan rules vary, but some employers require you to spend F.S.A. money by Dec. 31 or lose it. Others provide more flexible options: a grace period (often until about March 15) to incur any new expenses, or the option to carry $500 into the new year.

Dependent care accounts aren’t as flexible; the money has to be spent by Dec. 31. Still have a balance? Day camps during your child’s holiday break count — just be sure to get a receipt.

Taxpayers have been expected to report and pay tax on any gains from the trading of cryptocurrencies, but this year the I.R.S. is planning a direct approach with a new question on your 1040 form: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

If you did, it could be a taxable event. The rules are complicated, so be sure to check out the latest guidance on the I.R.S. site, which includes a list of frequently asked questions.

 
Finally, remember to check your withholding — yes, again — early next year. The I.R.S.’s Tax Withholding Estimator will be updated again soon, and that’ll be the time to make sure you’re on track for the 2020 tax year.

If you find that you’re not withholding enough, submit a new W-4. The I.R.S. released a new version of the form on Thursday.


New, confusing W-4 form is coming for 2020: What to do now to get bigger tax refund

, Detroit Free Press as in USA Today

Published 5:00 a.m. ET June 20, 2019

If you grumbled about the size of your tax refund or even writing a huge check for your federal income taxes in April, don't expect things to change without tinkering with a W-4. 

And if you think the current W-4 form is a headache, get ready for a migraine with a new form for 2020 and beyond.

Many people still should take time now to withhold more money out of their paychecks to cover their 2019 federal income taxes. Setting aside more money now through the rest of the year can trigger a bigger refund when you file your 2019 return – or you might avoid owing money to the federal government. 

If you're paid every two weeks, you could have a dozen or so paychecks ahead in 2019. It's enough to make a good dent.

Remember, not everyone was thrilled back in April

While many did see lower tax bills as part of the Trump tax cuts, some had to hand over money for federal income taxes in April because they had begun seeing slightly more money in their paychecks last year. 

"If they owed money and they were a little surprised by that, they might want to have their withholding adjusted with their employer," said Sandra Shecter, certified public accountant and principal for Rehmann in Troy. 

Throughout 2018, the Internal Revenue Service and others encouraged taxpayers to do a "Paycheck Checkup" to see if their withholding amount was on track. Many people didn't do that – and more likely than not, they're still dragging their feet in 2019.

How to fix that W-4 

The IRS calculator for a Paycheck Checkup can help you take a detailed look at your tax situation and better adjust your withholding amount when you file another W-4 form. You would need your most recent pay stubs, as well as a copy of your most recent tax return. 

And you'd need some time to fill out the online worksheet. 

Want a short-hand trick? Pull out your own regular calculator. 

If you owed $2,400 in April for your 2018 federal income taxes, for example, you might have an extra $200 a paycheck withheld beginning in late June if you're paid every two weeks. Figure out the number of paychecks you have left in the year and then divide the that number into what you owed.

See Line 6 of the current W-4 form and plug in a number for the "additional amount, if any, you want withheld from each paycheck." 

A little simple division may not be as precise as the online calculator but it's far better than throwing up your hands and doing nothing. 

Are you in one of these vulnerable groups?

Some groups are particularly vulnerable to not having enough money withheld now after the tax changes. They include households with two-income families, high incomes, homeowners who live in high property tax states, families who claim the child tax credit and those who lost deductions under the Trump tax reform, such as tax breaks related to unreimbursed employee expenses. 

For 2018, the IRS waived any penalties related to withholding too little in taxes during the year. In 2019, we can expect those penalties to return.

Shecter noted that some taxpayers will want to pay attention to the rules that could help them avoid penalties. Normally, no penalty applies if tax payments during the year meet one of the following tests: 

  • The person’s tax payments were at least 90% of the tax liability for 2019 
  • Or the person’s tax payments were at least 100% of the prior year’s tax liability or 2018. However, the 100% threshold is increased to 110% if a taxpayer’s adjusted gross income is more than $150,000 or $75,000 if married and filing a separate return. 

Now, of course, is as good of a time as any to reevaluate how much you're having withheld from each check. 

New design is supposed to simplify the W-4

Later this year, we can expect to hear more about the ongoing effort by the IRS to redesign form W-4 for determining how much money your employer should withhold for federal income taxes out of your paycheck. 

The "near-final draft" is expected to be released in July, according to the IRS, while the final version is expected to be released in November in time for 2020.

It's a vast understatement to say that no one, really, will ever use the word "simple" when referring to the revised, five-step W-4 form.

"This essentially is a mini-tax return," said Melanie Lauridsen, senior manager for tax policy and advocacy at the American Institute of CPAs.

The new form attempts to take into account the significant changes that were part of the Tax Cuts and Jobs Act of 2017.

On the plus side, the new form offers a line to reflect how many children you have in your family that are under the age 17 and how many dependents may be older. You'd see Step 3 on the new W-4 to take those ages into account. The age breakdown is important because the dollar amount for the actual tax credits related to children and dependents will vary based on age under the Trump tax revisions.

"In some respects, they've simplified it," Shecter said. 

A chance to disclose more, but should you?

Where things could get really tricky, though, is with Step 4 on the new W-4 form.

If you really want to be exact on the amount withheld, there's a section that offers optional adjustments. 

The optional adjustments can reflect other income, maybe from retirement income or dividends. 

The question, of course, becomes do you want your employer to know all your financial business?

"You wouldn't want your employer to know I've got millions in my bank account," said Lauridsen, at the American Institute of CPAs.

So you might not want to disclose on a W-4 that you've got $25,000 or more in "other income" on Line 4a. 

And if you're going beyond claiming the standard deduction, well, you'd be supplying more detailed information on Line 4b for deductions. That would include itemized deductions, such as mortgage interest, charitable contributions, as well as limited deductions for state and local income taxes and medical expenses. And that would reflect other deductions, such as for student loan interest. 

"I guess people will be hiring CPAs to fill out their W-4s," said George W. Smith, a certified public accountant with his own firm in Southfield.

"Good luck to the non-tax expert trying to fill this out," Smith said.

He and others are particularly focused on the format for calculating other income and deductions. How do you correctly project what your deductions – or extra income – will be in the year ahead? 

"In fairness to them, the IRS is trying its hardest to prevent the under withholding of federal income taxes by taxpayers due to the new tax laws in place," Smith said. 

Strategies for filling out the new W-4          

To be sure, there are some shortcuts that you could take with the new W-4.

Employees who have already submitted a form W-4 would not be required to submit a new one simply because of the redesign. If you're taking a new job at a new employer in 2020, though, you're going to have to fill out one of the new W-4 forms. 

To make things really simple, it would be possible to fill out only Step 1 on the new W-4 form and sign it. If that's done, your withholding would only be based on the standard deduction that applies to your filing status and the appropriate tax rates. The risk is that you could owe more than you'd expect once you file your tax return.  

Some who want to increase their withholding and still take a shortcut could just fill out Line 4c to enter "any additional amount you want withheld each pay period." 

Essentially, the new methodology of withholding is meant to account for taxable events or situations such as dual income spouses, interest income, dividends, capital gains, any taxable retirement income.

"The changes attempt to determine what the taxpayer’s actual taxable income and tax may be for the year and withhold accordingly," said James P. O’Rilley, CPA and tax director for Doeren Mayhew in Troy. 

"This is especially important to avoid penalties for underpayment of tax."

Employers had to use new withholding tables in early 2018 in order to get some of the benefits of tax cuts into the hands of the public throughout the year.

But many taxpayers ended up wondering what had happened to their typical refund. 

"In reality, they received a portion with each paycheck," O'Rilley said. "It tends to not feel the same when you get an extra $100 to $200 per month versus a $1,200 to $2,400 refund in April," he said.

Or worse yet, some owed money for the first time in years.


New W-4 Form Aims to Prevent Tax Refund Surprises, IRS Says

Upset with a smaller-than-anticipated tax refund this year? The IRS has a remedy for that.

The Internal Revenue Service is redesigning the key tax withholding form, the W-4, which tells employers how much to take out of your paycheck. The form is critical for filers to calculating withholding that wasn’t updated to reflect the new facets of the 2017 tax overhaul.

“The new design reduces the form’s complexity and increases the transparency and accuracy of the withholding system,” according to a Treasury Department fact sheet. “While it uses the same underlying information as the old design, it replaces complicated worksheets with more straightforward questions that make accurate withholding easier for employees.”

In the most recent filing season, some taxpayers expressed concerns that their refunds were much smaller than in past years. The old W-4, which hadn’t been updated to reflect all the changes to the law, is responsible for some of the surprises.

The new form, which was released as a draft on Friday, will be finalized in about a month and becomes effective on Jan. 1, 2020, a Treasury Department official said in a call with reporters. That means the forms won’t be available to help calculate withholding for the 2019 tax year.

The IRS released a draft of a revised W-4 last June but decided to rework it after concerns about the amount of information required if a worker had a second job, a Treasury official said.

The new form will be given to workers who start new jobs starting next year. Employees who do not switch employers aren’t required to fill out a new form, but can if they choose.

The new W-4 will reflect changes made in the 2017 tax cut law, which raised the standard deduction, lowered tax rates and altered available credits and deductions for taxpayers. The law also got rid of personal exemptions, an amount of money taxpayers could deduct for themselves and dependents.

The form will require taxpayers to fill out whether household members hold multiple jobs, dollar amounts for other income not automatically subject to withholding, such as pay from freelance work and anticipated tax credits and deductions. The form also allows for taxpayers to instruct their employer to take out additional money each pay period.

Employers then use that information to calculate how much tax to keep out of their workers’ paychecks and send to the IRS throughout the year. Employees who have more withheld than what they owe get a refund when they file their tax return the following year. Those who don’t have enough taken out end up owing the IRS the difference during tax season.

Confusion over whether the form would be revised before the first filing season under the new tax law kept many taxpayers from checking and adjusting their withholding rates, tax professionals have said.

The IRS is encouraging all workers to check their withholding using an online calculator so they aren’t surprised next year with their refund size.

Taxpayers should increase their withholding if they have multiple jobs or if they and their spouse are both employed, according to the Treasury fact sheet. People can reduce their withholding if they are eligible for tax credits and deductions, such as the child tax credit, the sheet said.

This year, the average refund was about 1.7% less than last year. In total, the IRS sent out about $7.5 billion less in refunds this year, according to agency data from earlier this month.

W-4s can be changed throughout the year and re-submitted to employers to reflect unexpected changes in income, or life events such as the birth of a child or a marriage.


Another tax headache ahead: IRS is changing paycheck withholdings, and it'll be a doozy

Janna Herron  for USA TODAY.com on 1:25 PM EDT Apr 11, 2019
 
You finally finished your taxes and are learning – for better or worse – the ins and outs of the new law.

But wait, the law isn’t done with you. There’s another complication coming out later this year: The Internal Revenue Service is changing how you adjust your paycheck withholdings, and early indicators show it won’t be easy.

The agency plans to release a new W-4 form that better incorporates the changes ushered in by the new tax law so that the amount held back for taxes in each of your paychecks is more accurate.

The agency’s goal: A taxpayer shouldn’t owe or be owed come tax time.

But the changes won’t be simple, says Pete Isberg, head of government affairs at ADP, the payroll and human resources company.

Filling out the new form will be a lot like doing your taxes again.

“It’ll be a much bigger pain,” he says. “The accuracy will be 100 percent, but the ease-of-use will be zero.”

What’s changing?

While the new form hasn’t been released yet, the IRS last summer put out a draft version and instructions  seeking feedback from tax preparation companies and payroll firms. Instead of claiming a certain amount of allowances based on exemptions – which have been eliminated – the draft form asked workers to input the annual dollar amounts for:

  • Nonwage income, such as interest and dividends
  • Itemized and other deductions
  • Income tax credits expected for the tax year
  • For employees with multiple jobs, total annual taxable wages for all lower paying jobs in the household

“It looked a lot more like the 1040 than a W-4,” Isberg says.

The new form referenced up to 12 other IRS publications to fill it out. It was so complex and different from the previous W-4 form that Ernst & Young worried employees would struggle to fill it out correctly and employers may need to offer training beforehand.

Why is it taking so long?

The tax and payroll community expressed many concerns about the draft form aside from its complexity.

Many cited privacy issues because the form asked for spousal and family income that workers might not want to share with their employers. Other employees may not want to disclose they have another job or do side work outside their full-time job.

To avoid disclosing so much private information, taxpayers instead could use the IRS withholding calculator, but it’s “not easy to use, and the instructions are confusing,” according to feedback from the American Payroll Association.

In September, the IRS scrapped plans to implement the new W-4 form for 2019 and instead is planning to roll it out for 2020.

What to expect

Another draft version of the new W-4 is expected by May 31, according to the IRS, which will also ask for public comment.

“We encourage taxpayers to take advantage of that opportunity and send us comments on the redesign,” says agency spokeswoman Anny Pachner.

The IRS will review the comments and plans to post a second draft later in the summer. The final W-4 version will be released by the end of the year in time for the 2020 tax year.

Once it arrives, you’ll probably need the following information on hand, says Kathy Pickering, executive director of H&R Block’s Tax Institute. That may mean lugging in past 1099 forms, paystubs or last year’s tax returns to fill it out correctly.

  • Your filing status
  • Number of dependents
  • Information about your itemized deductions such as home mortgage interest, state and local taxes, and charitable deductions
  • Earnings from all jobs
  • Information about nonwage income such as business income, dividends, and interest.

“If you’re married, and both you and your spouse work, it will also be helpful to know information about your spouse’s income,” she says.

You may also need to fill out a new state income withholding form. Many states use the current W-4 for withholding, but they may need to release their own forms, too.

 


Anger, Confusion Over Dwindling Refunds. Is Trump's Tax Plan To Blame?


Tax refunds issued so far are smaller than last year, IRS data show

BY IRINA IVANOVA on cbsnews.com

 / MONEYWATCH

Taxpayers got a double dose of bad news Friday when the Internal Revenue Service released figures on the first week of filing season. Not only has the agency processed fewer returns compared with the same time period last year as the IRS scrambles to catch up after closing during the partial government shutdown, but Americans also are seeing smaller refunds.

The IRS is also behind schedule following the record-long government shutdown that ended Jan. 25. While it received 12 percent fewer returns in the first week than in the same period last year, the agency has processed 26 percent fewer returns.

Refund amounts can vary a great deal. Last year, the average refund in any given week during filing season could range from $2,000 to just over $3,000. But for many taxpayers, and most working-class filers, the refund is the largest single cash infusion they'll get during the year.

Many taxpayers are taking to Twitter to complain about their smaller refunds, with some blaming the 2017 Tax Cuts and Jobs Act.

Few changed withholding amount

Of course, a smaller refund doesn't always mean someone paid more taxes. Early last year, businesses were encouraged to adjust how much tax they took out of employee paychecks to reflect the lower tax rates. The IRS also encouraged people to do a "paycheck checkup," saying that "some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks."

The trouble is, few Americans seem to have done that.

According to payroll processing firm ADP, a only a small fraction of workers bothered to change their withholding.

He added, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul."


Tax refunds issued so far are smaller than last year, IRS data show

BY IRINA IVANOVA on cbsnews.com

 / MONEYWATCH

Taxpayers got a double dose of bad news Friday when the Internal Revenue Service released figures on the first week of filing season. Not only has the agency processed fewer returns compared with the same time period last year as the IRS scrambles to catch up after closing during the partial government shutdown, but Americans also are seeing smaller refunds.

The IRS is also behind schedule following the record-long government shutdown that ended Jan. 25. While it received 12 percent fewer returns in the first week than in the same period last year, the agency has processed 26 percent fewer returns.

Refund amounts can vary a great deal. Last year, the average refund in any given week during filing season could range from $2,000 to just over $3,000. But for many taxpayers, and most working-class filers, the refund is the largest single cash infusion they'll get during the year.

Many taxpayers are taking to Twitter to complain about their smaller refunds, with some blaming the 2017 Tax Cuts and Jobs Act.

Few changed withholding amount

Of course, a smaller refund doesn't always mean someone paid more taxes. Early last year, businesses were encouraged to adjust how much tax they took out of employee paychecks to reflect the lower tax rates. The IRS also encouraged people to do a "paycheck checkup," saying that "some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks."

The trouble is, few Americans seem to have done that.

According to payroll processing firm ADP, a only a small fraction of workers bothered to change their withholding.

He added, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul."


Washington’s Fight Over Taxes Is Only Beginning

That tax battle is a byproduct of America’s polarized political climate and of the go-it-alone choices Republicans made to speed the 2017 law through Congress in less than two months.

It is already complicating tax planning for companies and workers around the country, particularly in high-tax states like New York, Maryland and California, where lawmakers are actively pursuing workarounds for some provisions of the new federal law that limit state and local income and property tax deductions.

It’s only going to get messier.

“This legal regime is very unstable; Congress has created many, many problems,” both in the substance of the bill and the exclusion of Democrats in enacting it, said Rebecca Kysar, a professor and tax expert at Brooklyn Law School. “All of those dynamics are going to make for a very uncertain landscape going forward.”

Democrats are evaluating how to “repeal and replace” the law, very likely by trying to keep breaks for the middle class but rolling back those for the rich and corporations. Party strategists expect that a replacement tax bill would be a top priority for Democrats if they manage to retake Congress in the fall, and a common cry for the party’s 2020 presidential contenders.

“If Democrats run from this fight, they will end up regretting it,” said Nicole Gill, executive director of Tax March, an advocacy group that is rallying Democrats and voters to oppose the law. “The fundamentals are on our side on this, and we need to talk about it.”

Even if the law survives those challenges, trouble lurks in the years to come. Nearly all of the law’s tax changes for individuals — including a nearly doubled standard deduction and the $10,000 cap on state and local tax deductions that has outraged blue-state legislators — are set to expire at the end of 2025, and so are some major provisions for businesses. Others won’t adjust for inflation, resulting in growing tax pain for some families in the years ahead.

PhotoRepublicans have already discovered drafting errors in the law that will need to be fixed by Congress or the Internal Revenue Service’s rule-makers. And as annual federal budget deficits rise toward $1 trillion, a threshold they could cross this year, pressure may mount on both parties to tweak the tax code further to avoid adding more to the national debt.

It all adds up to an uncertain future for any company or worker trying to plan around their tax liabilities for the next few years, at least.

“This is anything but tax simplification,” said Jeffrey C. LeSage, the Americas vice chairman of KPMG’s tax practice. “I don’t personally see us coming back to the rates that we’ve had, historically, on the corporate side. On the individual side, who knows?”

An old Washington axiom is that Congress passes a major tax overhaul once every 30 years. By that logic, the sweeping 2017 tax law, which was raced through Congress by Republicans before it was signed in late December by President Trump, was right on time. It came 31 years after the bipartisan tax reform of 1986.

But the similarities between the two efforts end there.

Bipartisan majorities in a divided Congress passed the 1986 law and, with plenty of Democratic support, President Ronald Reagan, a Republican, signed it. That legislation reduced individual tax rates by closing loopholes and raising corporate taxes, and it was designed not to add to the deficit.

By contrast, Republicans pushed the 2017 law through without a single Democratic vote, making use of a parliamentary maneuver called budget reconciliation. The law cuts the corporate rate to 21 percent from a high of 35 percent, while closing relatively few business loopholes.

It limits the amount of state and local taxes that workers can deduct, particularly workers in highly taxed, traditionally liberal states.

The new law creates ambiguities with a special deduction for some — but not all — so-called pass-through businesses, whose profits are distributed to owners and taxed under the individual code. That provision allows some professionals, like architects, to claim a 20 percent deduction on income earned through a pass-through — but it doesn’t allow lawyers or accountants to claim it. Tax professionals are nowhere close to consensuson who qualifies for it.

Furthermore, the law does not reduce America’s growing national debt. To the contrary, the Joint Committee on Taxation estimates that the law will add more than $1 trillion to federal deficits over 10 years.

All of those factors raise questions about the law’s future, particularly if Democrats retake control of Congress. In January, only a few days after Mr. Trump signed the law, a leading economist, Jason Furman, told an audience in Philadelphia that now, more than ever, the country needed real tax reform. Mr. Furman, who was chairman of the Council of Economic Advisers in the Barack Obama administration, has since written an op-edcalling on Democrats to “repeal and replace” the law.

For individuals, a repeal push could add confusion to an already murky transition to the new law.

The Trump tax overhaul eliminated personal exemptions that taxpayers may claim for themselves and their dependents, but it added a larger standard deduction and an expanded child tax credit. It reduced the cap on the mortgage interest deduction for newly purchased homes, and it limited state and local tax deductions to $10,000 a year — a number that will not rise with inflation.

As the law is written, those changes are set to vanish at the end of 2025 — reviving the old system and tax rates for individuals — unless Congress extends them.

But lawmakers in several states are trying to effectively invalidate some parts of the law well before then. They are pushing legislation that could allow higher-earning individuals to bypass the limits on state and local tax deductions.

One proposal would allow individuals to give “charitable contributions” to schools or other branches of government and see their taxes reduced accordingly. Another would convert state income taxes to an employer-side payroll tax, which would still be deductible on federal tax returns.

The state and local tax deduction seems particularly ripe for congressional fighting in the months to come. Many conservatives still want to eliminate it entirely. Many Democrats — and some blue-state Republicans — want to restore it in full. The outcome matters most for upper-income taxpayers in higher-tax states, some of whom may be tempted to move if the deduction is scrapped permanently.

Prominent conservative Republicans in the House have already introduced legislation that would affect a much broader spectrum of taxpayers by making the individual cuts in the new law permanent.

“American families deserve better than the uncertainty that comes along with waiting for future solutions,” Representative Mark Meadows of North Carolina, who heads the conservative House Freedom Caucus, and Representative Rodney Davis of Illinois wrote in The Hill after introducing that bill. “It’s on the current Congress to pass legislation now to give working families the long-term security they need.”

Democrats had a chance to vote for amendments on the 2017 bill that would have made those cuts permanent, but did not.

It’s not clear if Congress can even agree to fix glaring problems in the new law, including a provision that unintentionally gave agricultural cooperatives a big advantage over their larger competitors.

It’s also not clear how much leeway the I.R.S. will have to close loopholes in the law, such as one recently discovered by hedge fund managers, who may use it to reduce their liability for the “carried interest” paid to them from investment fund returns.

“Over the next year, or more, there’s going to need to be more guidance,” said Joseph Perry, the tax and business services leader at the accounting firm Marcum. “I think it’s going to be very interesting.”

Interesting for tax professionals, yes. But for workers and companies, it could prove infuriating — and endlessly so.


Washington’s Fight Over Taxes Is Only Beginning

That tax battle is a byproduct of America’s polarized political climate and of the go-it-alone choices Republicans made to speed the 2017 law through Congress in less than two months.

It is already complicating tax planning for companies and workers around the country, particularly in high-tax states like New York, Maryland and California, where lawmakers are actively pursuing workarounds for some provisions of the new federal law that limit state and local income and property tax deductions.

It’s only going to get messier.

“This legal regime is very unstable; Congress has created many, many problems,” both in the substance of the bill and the exclusion of Democrats in enacting it, said Rebecca Kysar, a professor and tax expert at Brooklyn Law School. “All of those dynamics are going to make for a very uncertain landscape going forward.”

Democrats are evaluating how to “repeal and replace” the law, very likely by trying to keep breaks for the middle class but rolling back those for the rich and corporations. Party strategists expect that a replacement tax bill would be a top priority for Democrats if they manage to retake Congress in the fall, and a common cry for the party’s 2020 presidential contenders.

“If Democrats run from this fight, they will end up regretting it,” said Nicole Gill, executive director of Tax March, an advocacy group that is rallying Democrats and voters to oppose the law. “The fundamentals are on our side on this, and we need to talk about it.”

Even if the law survives those challenges, trouble lurks in the years to come. Nearly all of the law’s tax changes for individuals — including a nearly doubled standard deduction and the $10,000 cap on state and local tax deductions that has outraged blue-state legislators — are set to expire at the end of 2025, and so are some major provisions for businesses. Others won’t adjust for inflation, resulting in growing tax pain for some families in the years ahead.

PhotoRepublicans have already discovered drafting errors in the law that will need to be fixed by Congress or the Internal Revenue Service’s rule-makers. And as annual federal budget deficits rise toward $1 trillion, a threshold they could cross this year, pressure may mount on both parties to tweak the tax code further to avoid adding more to the national debt.

It all adds up to an uncertain future for any company or worker trying to plan around their tax liabilities for the next few years, at least.

“This is anything but tax simplification,” said Jeffrey C. LeSage, the Americas vice chairman of KPMG’s tax practice. “I don’t personally see us coming back to the rates that we’ve had, historically, on the corporate side. On the individual side, who knows?”

An old Washington axiom is that Congress passes a major tax overhaul once every 30 years. By that logic, the sweeping 2017 tax law, which was raced through Congress by Republicans before it was signed in late December by President Trump, was right on time. It came 31 years after the bipartisan tax reform of 1986.

But the similarities between the two efforts end there.

Bipartisan majorities in a divided Congress passed the 1986 law and, with plenty of Democratic support, President Ronald Reagan, a Republican, signed it. That legislation reduced individual tax rates by closing loopholes and raising corporate taxes, and it was designed not to add to the deficit.

By contrast, Republicans pushed the 2017 law through without a single Democratic vote, making use of a parliamentary maneuver called budget reconciliation. The law cuts the corporate rate to 21 percent from a high of 35 percent, while closing relatively few business loopholes.

It limits the amount of state and local taxes that workers can deduct, particularly workers in highly taxed, traditionally liberal states.

The new law creates ambiguities with a special deduction for some — but not all — so-called pass-through businesses, whose profits are distributed to owners and taxed under the individual code. That provision allows some professionals, like architects, to claim a 20 percent deduction on income earned through a pass-through — but it doesn’t allow lawyers or accountants to claim it. Tax professionals are nowhere close to consensuson who qualifies for it.

Furthermore, the law does not reduce America’s growing national debt. To the contrary, the Joint Committee on Taxation estimates that the law will add more than $1 trillion to federal deficits over 10 years.

All of those factors raise questions about the law’s future, particularly if Democrats retake control of Congress. In January, only a few days after Mr. Trump signed the law, a leading economist, Jason Furman, told an audience in Philadelphia that now, more than ever, the country needed real tax reform. Mr. Furman, who was chairman of the Council of Economic Advisers in the Barack Obama administration, has since written an op-edcalling on Democrats to “repeal and replace” the law.

For individuals, a repeal push could add confusion to an already murky transition to the new law.

The Trump tax overhaul eliminated personal exemptions that taxpayers may claim for themselves and their dependents, but it added a larger standard deduction and an expanded child tax credit. It reduced the cap on the mortgage interest deduction for newly purchased homes, and it limited state and local tax deductions to $10,000 a year — a number that will not rise with inflation.

As the law is written, those changes are set to vanish at the end of 2025 — reviving the old system and tax rates for individuals — unless Congress extends them.

But lawmakers in several states are trying to effectively invalidate some parts of the law well before then. They are pushing legislation that could allow higher-earning individuals to bypass the limits on state and local tax deductions.

One proposal would allow individuals to give “charitable contributions” to schools or other branches of government and see their taxes reduced accordingly. Another would convert state income taxes to an employer-side payroll tax, which would still be deductible on federal tax returns.

The state and local tax deduction seems particularly ripe for congressional fighting in the months to come. Many conservatives still want to eliminate it entirely. Many Democrats — and some blue-state Republicans — want to restore it in full. The outcome matters most for upper-income taxpayers in higher-tax states, some of whom may be tempted to move if the deduction is scrapped permanently.

Prominent conservative Republicans in the House have already introduced legislation that would affect a much broader spectrum of taxpayers by making the individual cuts in the new law permanent.

“American families deserve better than the uncertainty that comes along with waiting for future solutions,” Representative Mark Meadows of North Carolina, who heads the conservative House Freedom Caucus, and Representative Rodney Davis of Illinois wrote in The Hill after introducing that bill. “It’s on the current Congress to pass legislation now to give working families the long-term security they need.”

Democrats had a chance to vote for amendments on the 2017 bill that would have made those cuts permanent, but did not.

It’s not clear if Congress can even agree to fix glaring problems in the new law, including a provision that unintentionally gave agricultural cooperatives a big advantage over their larger competitors.

It’s also not clear how much leeway the I.R.S. will have to close loopholes in the law, such as one recently discovered by hedge fund managers, who may use it to reduce their liability for the “carried interest” paid to them from investment fund returns.

“Over the next year, or more, there’s going to need to be more guidance,” said Joseph Perry, the tax and business services leader at the accounting firm Marcum. “I think it’s going to be very interesting.”

Interesting for tax professionals, yes. But for workers and companies, it could prove infuriating — and endlessly so.


Tax Law Offers a Carrot to Gig Workers. But It May Have Costs.

The New York Times · by NOAM SCHEIBER · December 31, 2017

The tax bill signed by President Trump could let independent contractors like Uber drivers claim a 20 percent deduction on their earnings. But some labor advocates say the provision could ultimately hurt more workers than it helps. Sam Hodgson for The New York Times

The new tax law is likely to accelerate a hotly disputed trend in the American economy by rewarding workers who sever formal relationships with their employers and become contractors.

Management consultants may soon strike out on their own, and stockbrokers may hang out their own shingle.

More cable repairmen and delivery drivers, some of whom find work through gig economy apps like Uber, may also be lured into contracting arrangements.

That’s because a provision in the tax law allows sole proprietors — along with owners of partnerships or other so-called pass-through entities — to deduct 20 percent of their revenue from their taxable income.

The tax savings, which could be around $15,000 per year for many affluent couples, may prove enticing to workers. “If you’re above the median but not at the very, very top, one would think you’d be thinking it through,” said David Kamin, a professor of tax law at New York University.

The provision may also turn out to be a boon for employers who are trying to reduce their payroll costs. Workers hired as contractors, who tend to be cheaper, may be less likely to complain about their status under the new tax law.

“Firms currently have a lot of incentives to turn workers into independent contractors,” said Lawrence Katz, a labor economist at Harvard. “This reinforces the current trends.”

But it could lead to an erosion of the protections that have long been a cornerstone of full-time work.

Formal employment, after all, provides more than just income. Unlike independent contractors, employees have access to unemployment insurance if they lose their jobs and workers’ compensation if they are injured at work. They are protected by workplace anti-discrimination laws and have a federally backed right to form a union.

Those protections do not generally apply to contractors. Nor do minimum-wage and overtime laws.

“What you’re losing is the safety nets for those workers,” said Catherine Ruckelshaus of the National Employment Law Project, an advocacy group.

Traditional full-time jobs also insulate workers against the peaks and troughs in the demand for their services. Consider, for instance, the erratic income of retail or fulfillment-center workers hired in the fall and let go after the holidays.

Workers like janitors were once typically on the payrolls of large companies, enabling their wages to rise with those of other employees if the business did well. Now, such work is increasingly done by contractors. Lucy Nicholson/Reuters

And because companies have internal pay scales, the lowest-paid employees tend to make more than they would on the open market.

“It used to be that companies like G.M. or the local bank or factory directly employed the janitor, the clerical worker,” Professor Katz said, noting that their pay would rise along with other employees’ when the company was doing well.

Unwinding employment relationships eliminates these benefits, increasing the volatility of workers’ incomes and magnifying pay disparities and inequality.

It’s difficult to say how many workers would choose to become contractors as a result of the new provision, which for couples frequently begins to phase out at a taxable income above $315,000. Mr. Kamin said joint filers who make close to $315,000 and could transform most of these earnings into business income would find it most compelling to make the change. (It could be more compelling still if one spouse’s employer offered the couple health insurance, which many employers provide even though they aren’t required to.)

On the other hand, many individuals fail to avail themselves of existing tax deductions, like the one that freelancers can take for their expenses, said Jamil Poonja of Stride Health, which helps self-employed workers buy health insurance. That may reflect the lack of access among lower-earning workers to sophisticated tax advice.

The tax benefit could also be offset in some cases by the need for contractors to pay both the employer and employee portion of the federal payroll tax.

Many employers are already pushing the boundaries of who they treat as employees and who they treat as independent contractors.

In theory, it is the nature of the job, and not the employer’s whim, that is supposed to determine the worker’s job status.

If a company exerts sufficient control over workers by setting their schedules or how much they charge customers, and if workers largely depend on the company for their livelihood, the law typically considers those workers to be employees.

True contractors are supposed to retain control over most aspects of their job and can typically generate income through entrepreneurial skill, and not just by working longer hours.

In practice, however, many companies classify workers who are clearly employees as contractors, because they are usually much cheaper to use. And many labor advocates say the new tax deduction will encourage more employers to go that route by giving them an additional carrot to dangle in front of workers.

“The risk presented by this provision is that employers can go to workers and say, ‘You know what, your taxes will go down, let me classify you as an independent contractor,’” said Seth Harris, a deputy labor secretary under President Barack Obama.

Anything that makes workers more likely to accept such an arrangement makes it harder to root out violations of the law. That is because the agencies responsible for policing misclassification — the Labor Department, the Internal Revenue Service, state labor and tax authorities — lack the resources to identify more than a fraction of the violations on their own.

“Your chances of finding a worker that’s been misclassified if that worker has not complained are worse than your chances of finding a leprechaun riding a unicorn,” Mr. Harris said.

David Weil, the administrator of the Labor Department’s Wage and Hour Division under Mr. Obama, believes the change will add fuel to a trend that has been several decades in the making.

During that time, as Mr. Weil documented in a book on the subject, “The Fissured Workplace,” employers have steadily pushed more work outside their organizations, paring the number of people they employ and engaging a rising number of contractors, temporary workers and freelancers.

The tax law will accelerate the shift, he said, because employers who are already keen to reorganize in this way will recognize that even fewer workers are likely to object as a result of the tax benefits.

The effect of the deduction could be especially big in industries where misclassification is already rampant.

Many small-time construction contractors hire full-time workers who should be classified as employees but are kept on as freelancers or paid under the table, said Kyle Makarios, political director for the United Brotherhood of Carpenters and Joiners of America.

Mr. Makarios said the pass-through provision would encourage even more building contractors to misclassify workers, allowing them to reduce their labor costs and underbid contractors who play by the rules.

The practice by ride-hailing companies like Uber and Lyft of classifying drivers as independent contractors has long been criticized by labor advocates and plaintiffs’ lawyers. They argue that the companies control crucial features of the working relationship and hold most of the economic power.

Neil Bradley, senior vice president and chief policy officer at the U.S. Chamber of Commerce, said that gig-economy companies classify workers as contractors when it suits the needs of their business and that he did not expect that to change. He also said he did not expect firms with traditional business models to follow suit as a result of the new provision.

“I think the decision is going to be driven by the considerations” that lawyers cite, such as the amount of control a company exercises, he said, “not by this tax bill.”

But Mr. Weil was less sanguine.

“These kinds of approaches to making it easier to slide into independent contractor status reflect unequal bargaining power,” he said. “When you add to that an additional financial incentive, you’re just unwinding the whole system.”