New federal income tax laws may help or hurt someone in the long run — but they’re bound to cause chaos in the short run.
Nebraskans are learning that anew while figuring their annual taxes for the first time since Congress’ 2017 tax overhaul, said Tom Purcell, chair of the Department of Accounting at Omaha’s Creighton University, and Michael Cook of North Platte, a volunteer tax preparer who coordinates AARP’s free twice-weekly Tax Aide sessions at the North Platte Public Library.
“The consistent thing we’re seeing is people are surprised that their refunds are smaller and sometimes they’re paying,” Purcell said. “They didn’t expect that to happen.”
Though Purcell doesn’t have a private tax practice, he said, he supervises Creighton accounting students who assist in university-sponsored Volunteer Income Tax Assistance sessions in the Omaha area.
The main culprits in shrinking or wiping out refunds, he said, are proving to be the new law’s doubling of the federal standard deduction — removing the need or ability to itemize expenses — and failure to adjust one’s tax withholding last year when the Internal Revenue Service advised Americans to do so.
Those factors are real, Cook said, though they’re having less of an impact on the low-income and senior citizens he and seven other volunteer preparers work with at the North Platte library.
But uncertainty about the 2017 tax law’s impact has slowed down attendance, he said.
The AARP tax sessions had helped only about 100 people through last Wednesday, down from about 150 at the same point most years. AARP’s local volunteers usually help about 500 taxpayers by the annual April 15 deadline.
“If they’re afraid what’s going to happen, they should talk to a tax lawyer or tax accountant and say, ‘Here’s what I have, and what do I do now?’” Cook said. “They’ve got until April 15 to at least mitigate some of the loss.”
The 2017 tax law nearly doubled federal taxpayers’ standard deduction to $12,000 per person or $24,000 per married couple filing jointly. While that change simplifies tax returns for many taxpayers, Purcell said, Congress also eliminated personal and dependent exemptions.
Lower tax rates and higher child tax credits in the bill are meant to partly offset that loss, he said. Even so, members of Congress who favored the measure “tried to make people think that they were going to get these large refunds,” he said. Losing the exemptions “has kind of changed the dynamic.”
As taxpayers sort through those changes, Purcell and Cook said, many who had itemized deductions in past years are finding the standard deduction is worth more than itemizing. Even so, some are getting lower refunds or having to pay the IRS, they said.
Another unexpected effect is appearing when taxpayers move to figuring their Nebraska income taxes, Cook said. Though Nebraska’s standard deduction is only a bit more than half the increased federal deduction, federal law requires taxpayers to either take the standard deduction on both forms or itemize on both.
As a result, Cook said, some or all of their federal savings from taking the standard deduction might be lost on the state return. “So what we’re doing with a lot of folks is if they itemized in the past, we figure it as though they’re itemizing (this year) and decide what’s the best option for them.”
Still another reason for net tax bills on 2018 returns, Cook and Purcell said, is IRS slowness to update withholding tables last year after the 2017 law took effect.
Cook said middle-income households that failed to change withholding allowances — mainly those making $65,000 to $120,000 a year — seem more likely to pay the price now. Taxpayers who didn’t update withholding for 2018 should act now so they don’t have to make up 2019 withholding next winter, he and Purcell said.
Churches and nonprofit groups have feared the higher standard deduction would hurt them because taxpayers might not donate to charitable causes if they don’t have to itemize to get a tax break.
That scenario isn’t as likely to affect groups like churches that depend on week-to-week donations, Purcell said. Research has shown “lower-income taxpayers make gifts because they want to help the organization, not because they want a tax deduction.”
But “where you’ll see the difference, perhaps, is (with) people who are making larger gifts who are on the edge of itemizing or not,” he added.
Some older married couples, Purcell said, also may want to consult a tax adviser in light of the new law’s changes in federal gift and estate exemptions. Each member of the couple now can exclude $11.2 million — more than double the previous amount — and can transfer that exclusion to his or her spouse if he or she dies first.
Farmers and ranchers should find several positive benefits in the 2017 law, Purcell said. Though they’ll find interest deductions more limited, a lower 28 percent corporate tax rate will help.
Also, “they could write off an equipment purchase the year they buy it, rather than depreciating it for a period of time,” he said.