How Deduction Restrictions Hurt Tax Planningby
With all the media coverage of the Tax Cuts and Jobs Act (TCJA) focusing mainly on lower tax brackets, receiving less attention were provisions that deep-sixed deductions for fees paid for preparation of returns and advice on tax planning.
In my view, the new rules unfairly target taxpayers compelled to get such help. Every year, filers not only need help filling out Form 1040, they frequently need guidance on how to respond to IRS computer-generated assessments of penalties for not submitting returns and payments by their due dates and for interest charges for overdue payments.
Dial up the IRS and its under-staffed, under-funded and slow-to-respond employees will insist that taxpayers promptly respond to these notices -- written in indecipherable bureaucratese -- or become liable for additional penalties and interest.
What are taxpayers to do? Many pay for professional help available from accountants, lawyers, enrolled agents, financial planners and others (not all of whom, in my experience, are equally talented; that’s another discussion for a different time).
Beginning with 2018 tax returns (filed in 2019), TCJA prevents itemizers who use Form 1040’s Schedule A from deducting fees for preparation of 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:
- how to enter into or to unwind marriages
- estate planning
- when and how much to withdraw from Individual Retirement Accounts and other kinds of tax-deferred retirement plans
- whom to designate as beneficiaries of those accounts
- appraisals to determine how much can be claimed for charitable contributions of art work and other kinds of property
- settlements of claims involving sexual harassment or other kinds of misbehavior
Amidst these tax thorns, there's a rose: Revenue Ruling 92-39. It authorizes fee splitting for that portion of tax preparation and planning fees that are allocable to Schedules C, E or F.
Taxpayers, can, therefore, 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.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).