Tax Cuts and Jobs Act, Complexity and Data

There is certainly some new complexity in the Tax Cuts and Jobs Act (P.L. 115-97 (12/22/17)). But it won’t affect most individual filers. Here are some data points to support that statement.

• Prior to reform, IRS data indicate that 69% of individual filers claim the standard deduction rather than itemize deductions. The increase to the standard deduction by the TCJA will increase that number significantly. Thus, fewer people deal with itemized deductions.

• 16% of filers file a Schedule C (2015 data; about 18.8 million reporting income and 5.9 million reporting loss). Those generating income will likely qualify for and need to (and want to) deal with the new Section 199A, Qualified Business Income deduction but most will be below the income limits in this rule which means the calculation will be simpler than for the minority of individuals with higher income ($157, 500 if single and $315,000 if married filing jointly).

• IRS stats indicate that 83% of individual filers have adjusted gross income (AGI) of $100,000 or less. Individual filers hit the top 10% of filers by AGI once they reached AGI of $133,445 (for 2014).

• Also, per IRS stats, only about 6% of individual returns report S corp or partnership income, so will deal with the new Section 199A deduction but some of these folks overlap with the Schedule C filers.

• Also per IRS stats, about 7% of individual filers report rent or royalty income which can also lead to calculating a Section 199A deduction. But again, there is overlap among the filers meaning that they might have a Schedule C, partnership income and/or rental income.

• Zillow Research estimates that with the lower acquisition debt cap of $750,000 for qualified residence interest (mortgage interest) (note it is up to $1 million if it existed at 12/15/17), and the cap on state and local tax deduction, only about 14% of homes are likely to lead the owner to itemize deductions. They note that the percentage varies from county to county. (! – that’s my comment living in an area where the median home price is just over $1 million! [see 1/29/18 Mercury News article])

So, yes, complexity exists along with getting used to a variety of new rules depending on the types of income you have, but compliance remains relatively simple if you only have wage income and can file a Form 1040-EZ or 1040-A. But so far as transparency, I think many individuals may be confused as to what has changed for their income tax calculation (such as personal and dependency exemptions versus a child credit and non-child dependency credit, etc.).

For CPAs, their client base tends to include the individuals in the top 20 to 30% of income levels and so they deal with the complexity, as well as dealing with business returns which can often involve complex multijurisdictional transactions and complex tax rules.

What do you think?