President Trump asserted that H&R Block would close its doors due to the simplicity of his tax reform.
However, the tax plan devised by the Republicans and Trump will likely not eliminate the need for tax preparation services.
The final tax legislation, released on Friday, does provide some level of simplification, but not to the extent that was promised. Additionally, it introduces a host of complications, especially for small businesses.
Republicans have claimed that their tax proposal would allow taxpayers to file their returns on a postcard. This seems improbable. Even if the IRS were to simplify the 1040 form, individuals would still need to sift through a plethora of instructions to complete it accurately.
The plan does merit recognition for its simplification efforts, as experts note that the standard deduction nearly doubles to $12,000 for single filers and $24,000 for joint filers.
This change would significantly lower the number of taxpayers who opt to itemize deductions since itemizing only makes sense if your deductions surpass the standard deduction.
Itemizing requires extensive record-keeping to monitor eligible expenses, followed by determining if your income or other circumstances limit your deduction amounts.
Related: Here’s what’s in the GOP’s final tax plan
Overall, approximately 30 million households that currently itemize are expected to take advantage of the nearly doubled standard deduction instead.
“[It] should streamline tax record maintenance and reporting. Taxpayers may not notice this change immediately, but over time they should adapt their practices,” stated Mark Mazur, director of the Tax Policy Center.
Nonetheless, many of those 30 million will still need to conduct calculations to determine whether to itemize or opt for the standard deduction, according to Martin Sullivan, chief economist at Tax Analysts.
Related: Changes to the child tax credit – What it means for families
Of course, deductions are not the sole tax benefits that come with intricate eligibility guidelines, income phaseouts, and other convoluted limitations.
The GOP tax plan retains and, in some cases, expands various tax credits. The rules governing these credits remain non-intuitive, just as they do under the existing code. The complexities surrounding the Earned Income Tax Credit and the Child Tax Credit, for instance, will persist.
Even if tax filing were simplified to a mere postcard format, each line item would still require extensive instructions and forms to substantiate the reported numbers, explained Kathy Pickering, executive director of The Tax Institute at H&R Block.
Also, it’s important to acknowledge that the tax legislation maintains the Alternative Minimum Tax for individuals. While it raises exemption levels and reduces the number of affected individuals, taxpayers will still need to determine their eligibility. This requires calculating tax liabilities under two different sets of rules and paying the higher amount.
Related: What’s in the tax bill for homeowners
Finally, experts express concerns that the GOP tax plan may complicate tax filing even further for individuals with business income from pass-through entities, which are not taxed under corporate tax laws. These include sole proprietorships, partnerships, and limited liability companies. Owners, partners, and shareholders pay taxes on their respective returns for these pass-throughs.
Under the GOP tax proposal, wages, pass-through business income, and corporate profits would be taxed at significantly different rates, while currently, wages and pass-through income are subjected to identical rates. The legislation necessitates a convoluted calculation to ascertain how much of a pass-through business owner’s income is eligible for the lower business rate compared to the higher wage rate.
“The rules governing pass-through entities are exceedingly complex,” Mazur of the Tax Policy Center remarked. “I anticipate taxpayers and their advisors will strive to exploit [these rules].”
