DENHAM SPRINGS – Chase Ruiz admits he gets up in the morning ready to dive into the U.S. tax code.
So, for the many questions that come up during the tax season, he has answers: Things have changed. Don’t worry, he said, 'When in doubt, ask your tax adviser.'
The main question people have, according to the CPA/tax manager for Hannis T. Bourgeois CPAs, is: “Am I going to do any better or worse?”
His answer: “A majority of taxpayers will be in a better position” filing their 2018 tax returns since the changes reduce the tax burden on individuals.
Ruiz made that and other observations on last year’s tax reforms when he talked to the Rotary Club of Livingston Parish on Friday, Feb. 8. Among the main changes, Ruiz said, are new tax rates, doubling the individual deduction, and elimination of many deductions.
For CPAs like himself, the tax reform is a challenge, Ruiz said.
The Tax Cut and Jobs Act runs 650 pages, he said, adding, “We got 1,000 pieces on IRS regulations to interpret it.
“Two thousand and nineteen is fun for our clients,” Ruiz said with a smile.
If anyone does not like what the tax reforms bring, all they have to do is wait - the tax changes for individual filers are temporary and expire in 2025, Ruiz said.
This was the only way to get congressional approval, although the tax changes for businesses are permanent, he said.
“Do I think it would have gone through on the individual side if made permanent? No chance,” Ruiz said.
“Numerous legislators from the Finance and Ways and Means committees wanted to address the temporary provisions and roll them into something permanent, but their attempts all failed,” Ruiz said.
He added it was unlikely that will happen now “with a fundamental shift in power in the House.
“Unless we get a permanent measure out of Congress, we will do this again or revert back to what we had before,” Ruiz said. “This is the largest tax package in the last 30 years. The last time we’ve seen anything this big was in 1986 with the Reagan tax reform.”
That reform package took three years for Congress to write and pass, he said.
“We got this in 3 months,” Ruiz said. “This stuff gets me up in the morning to dissect this.”
Using the large projection screen, Ruiz put up a sample of a 1040 tax form, a two-page document. He then began listing the reasons an individual filer would need to file a Schedule I, Schedule II or Schedule III form – “Now we have five pages instead of two (pages) to file.”
For self-employment tax, there was Schedule 4, he added, and to reconcile estimated tax payments, there was Schedule 5 – “Now seven pages” – and if a third party prepared the tax form, there was a Schedule 6.
“All the information on two forms is now up to eight forms,” Ruiz concluded. “If your preparation fees have gone up, this is why.”
If you mail in a paper tax return, the postage will cost more, he said. “For the ecological friendly, that’s a substantial amount of paper,” he added.
"The talk at one time was to make the tax form so simple, it would get everybody to file on a postcard," Ruiz said. “But government strategy isn't to simplify things, it must over complicate things."
In offering some background, Ruiz said Congress wanted to pass some type of tax reform, with four goals from the White House:
-- Tax relief for the middle class.
-- Simplification of filing.
-- Spur economic growth.
-- Repeal overseas income advantages.
These were the main goals of the Tax Cut and Jobs Act, which Ruiz referred to as the “TCJ.”
“It was unlikely (the Republicans) were going to get any support from across the aisle,” Ruiz said, referring to the Democrats.
So, Republicans used the budgetary reconciliation strategy to get it passed, but it had to have one requirement: “It had to be a revenue neutral bill,” Ruiz said. This meant if taxes were cut on one area, it had to be offset with revenue raised in another area, he explained.
Ruiz described it like putting a big sheet of paper on a wall, so, “Changes in this area,” he said, gesturing to the left, “means changes in that area,” he said, gesturing to the right.
“They put every proposal … on the wall and if it has a budgetary effect, or cut here, there has to be a raise there, so it equals zero.”
“By doing this, they passed it with no across-the-aisle support and a simple majority,” he said.
Ruiz listed the following changes brought by the tax reform legislation:
-- The tax burden to an individual was lowered from 39.6 percent in 2017 to 37 percent for 2018-25, he said.
-- The standard $12,000 deduction for an individual has been raised to $24,000.
-- Doubled the tax credit for a child to $2,000.
-- The medical expenses deduction was raised from 7.5 percent of Adjusted Gross Income (AGI) in 2017 to 10 percent of AGI.
-- Many of the standard deductions are now disallowed, he said.
“Congress’ mode of thinking is not letting you do it,” Ruiz said. Personal exemptions in 2017 were around $4,000 per claim, he explained. “The thought process was to disallow them with the doubled standard deduction offsetting the need for exemptions."
-- Miscellaneous itemized expenses -- tax preparation fees, safety deposit box fees, adviser fees, unreimbursed employee expenses -- are gone.
-- Personal casualty loss deduction was eliminated unless it is a “federally recognized disaster loss in a presidentially declared disaster area,” Ruiz said, such as a hurricane.
-- Mortgage interest deduction has been cut from $1 million to $750,000.
Losses from a flood declared "a federal disaster" can be filed, he added.
“Congress gave us a haircut,” Ruiz said.
Interest paid on a home equity loan is no longer deductible, he said, unless the loan was taken out to improve a residence. The interest is still deductible, “provided you don’t go over the $750,000 level,” Ruiz said.
In high income-tax states, such as Louisiana, the changes that limit deducting state and local taxes paid is a “very contentious point of the TCJ,” Ruiz said.
“Coastal states with historical higher rates see an undue burden,” Ruiz said. “Limiting this deduction will cause a substantial negative effect. We’ve seen a lot of movement in this area, and actual litigation by some states to directly contest this point.”
Since the tax reform legislation expires in 2025, Ruiz said he expects to see changes in the tax code in the next couple of years.
“We will be fighting about this and Congress is trying to figure out what to do,” he said. “The IRS, besides working for free for the past month, is trying to write reg(ulation)s to tell us how to use this.”