Post-Tax Filing Season Update

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With April 15th already in the rearview mirror, we wanted to take a look at how the Jobs Cuts and Tax Act (TCJA) affected the filing season. The avalanche of new tax rules as well as a host of new forms, procedures, and systems made it challenging for tax practitioners and taxpayers alike. Individuals and businesses had to negotiate brand-new changes requiring elections and other decisions, some detrimental and others beneficial. A five-week federal shutdown at the outset threw a monkey wrench into the entire process.


Despite the shutdown that ran from December 22 to January 25, the IRS opened tax filing season on time in late January. However, some new forms related to TCJA were unavailable, there were reports of long waits for assistance at the IRS, as well as a huge backlog of queries submitted before and during the shutdown. Delayed refunds were commonplace, although the lag time improved steadily and there were few technical issues in the actual filing process.


As taxpayers began filing returns, it became clear that expected refunds were shrinking or disappearing altogether. The IRS reported early in the season that, despite promises of lower taxes resulting from TCJA, average refunds were down. It recently announced a $4.4 billion decrease in refunds compared to last year's season. This was due largely to a change made to the wage withholding rules in early 2018 in response to the new law - people saw larger paychecks all year but upon filing found their refunds shrunk considerably. Some taxpayers who had always received refunds even owed money to the IRS this year.


Many taxpayers still had withholding certificates on file with their employers based on personal exemptions that were no longer in the tax code and itemized deductions that were limited (or repealed outright) by TCJA. The Government Accountability Office expected nearly 30 million taxpayers to be underpaid, with many at risk for penalties for underestimating their tax. The IRS responded by lowering the threshold for when the penalty applies, which normally kicks in when the tax paid during the year is less than 90% of the prior year's tax. In January the IRS dropped this to 85% for 2018 returns, and in March announced a further reduction to 80%.


Please note that for 2019 returns, when the penalty threshold returns to 90%, this relief will no longer apply. Your LM Cohen professional can review the withholding on your salary to make sure your tax will be properly paid this year. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

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