So much for doing your taxes on a postcard.
When Republicans in Washington were promoting their tax reform plan ahead of the 2018 filing season, they held up postcards and declared: This is all most Americans will need to fill out their tax returns.
The postcards lasted one year. The Internal Revenue Service ditched the small Form 1040 after the 2018 season as tax pros complained that it actually made tax-filing MORE confusing because the lines that were deleted weren’t really deleted; they were just moved to other schedules.
For 2019 tax returns that are being filed now, the 1040 form will return to its pre-2018 size of two full sheets of paper. Does this mean that the tax reform passed prior to last year’s filing season failed to make filing simpler? Well, let’s see.
Tax reform doubled the standard deduction, sparing more taxpayers the ordeal of adding up slips of paper to make a list of itemized deductions. That list must add up to a lot more than it used to for itemizing to be worthwhile. The standard deduction rises again for tax year 2019, to $12,200 for singles and $24,400 for couples.
Taking the standard deduction means you can’t write off charitable contributions or mortgage interest on your federal return anymore, but selling a stock for a loss in 2019 or contributing to an IRA by April 15, 2020, can still save you money.
Whether to itemize or take the standard deduction will become an easier decision as taxpayers get used to the new law. Meanwhile, tax preparation software or a tax pro can walk you through this with ease. More than 90 percent of taxpayers are expected to take the standard deduction this year, up from about 70 percent before tax reform.
So, for most Americans, filing your federal taxes did get simpler, but filing your California return got more complicated because the Golden State did not go along with many of President Trump’s changes.
For example, the IRS loosened the rules on 529 education savings plans to allow pre-college expenses, but California didn’t. If you tap your 529 plan to pay for private elementary or high school, your withdrawals will be federally tax free but subject to California taxes on the earnings portion plus a 2.5% penalty.
And the tax changes keep on coming. The SECURE Act signed into law last month by President Trump changes rules for retirement savings starting with the 2020 tax year.
The age limit for contributing to an IRA was eliminated, opening doors for retirement savers to grow their accounts. Previously, those over 70½ were prohibited from contributing.
The age at which you are required to start withdrawing from your IRA was raised from 70 1/2 to 72, so your money can grow longer without being subject to tax.
The “stretch IRA” was eliminated for most beneficiaries other than spouses. That was a technique where non-spouse beneficiaries of an IRA could stretch their required minimum distributions over their lifetime — giving them more time for tax-deferred growth.
Now, instead of stretching those RMDs out, non-spouse beneficiaries must clean out the entire value of the account within 10 years of the IRA owner’s death.
Back when Republicans were holding up those postcards, my hope was that taxpayers would no longer have to spend countless hours preparing their taxes or pay a professional to file for them. So far, the promise of tax simplification remains elusive, especially for Californians.
If you need help, I have expanded the services I provide to now include tax preparation. Mark Rosenberg is a California Registered Tax Preparer (CRTP) in Scotts Valley. He can be reached at 831-439-9910 or email@example.com.