Jim de Bree | Observations from Tax Season and Onset of AI |
April 15 marks the completion of my 53rd spring tax season as a professional. Things have changed considerably since I began my career.
Back in the early 1970s, most tax returns were prepared by hand and were much simpler although not necessarily simpler to prepare. Technology has increased tax practitioners’ capabilities and efficiency, but it also has facilitated unfathomable tax law complexity.
Today, I am semi-retired and my practice consists of serving a few high-wealth families having complex tax situations.
This year marked the first year that artificial intelligence (AI) impacted my practice in both a positive and negative manner.
Most of my workpapers are contained in Microsoft Excel workbooks, which analyze and reformat data so that it can be exported into tax return preparation software. I found that I was able to automate several steps using AI to perform routine procedures that consumed my time in previous years.
This year’s tax return preparation process became more efficient and accurate.
I also began to use AI as my “staff associate” to perform research projects for me. I instructed AI in the research needed to be undertaken and the parameters for structuring the answer in a memo. I found that AI could do 10 hours of research in about four minutes. I then carefully reviewed the result.
AI’s analysis was usually about 85% correct, but the 15% that was not right would have resulted in serious malpractice issues if I had not carefully reviewed it. What would have been a 20-hour research project took about four or five hours to complete.
I also experienced AI’s downside.
For several years, I have been engaged as a tax consultant for a Wall Street law firm. I have a unique expertise that the law firm found useful. I was able to leverage my knowledge and apply it to devise optimal tax structures for complex real estate transactions.
I noticed last summer that I was getting asked fewer questions as if someone had suddenly turned off the spigot. Furthermore, when I was consulted, the questions were along the lines of how best to explain a tax issue to the client rather than resolving the underlying issue.
Recently, I read a column in a professional publication that was written by the law firm’s managing partner who said AI has revolutionized how they address complicated tax research. The bottom line is that I was replaced by Claude (Anthropic’s AI product).
Getting back to tax return complexity: The One Big Beautiful Bill Act added considerable complexity to my clients’ tax returns.
On average, the returns had five extra pages this year —largely because many of the act’s tax benefits are phased out at higher income levels. Many clients itemized their deductions this year because they could once again claim the benefits of the SALT deduction.
My clients whose income is derived principally from investments enjoyed a banner year from an income perspective, but they largely paid tax at lower capital gains rates. Those investors, on average, paid a lower percentage of their income in taxes than my other clients did. Our tax system taxes capital transactions at significantly lower rates than it taxes labor. As AI replaces labor, this paradigm will likely have to shift as there will be less labor to tax.
Clients who operated rental properties saw expenses increase faster than rent collections. Not only were margins squeezed, but in many instances, total collected rents declined from the previous year — particularly in states other than California.
Surprisingly, my clients’ California properties consistently outperformed similar properties in eight other states.
Several other states have sneakily increased their taxes. Some states now impose a surcharge on nonresidents who do business in their state. Property tax increases are also becoming more common.
Clients who are in service businesses also experienced declining margins as expenses outpaced revenue. My perception is those clients had a tougher year than my clients who operate rental properties. I have no manufacturing clients, so I cannot comment on their results.
The income reported on my clients’ 2025 tax returns reminds me a lot of the 1978-80 period. Growth seems to be slowing while costs are rapidly escalating. What is different today is a smaller appetite for foreign investment in U.S. real estate.
Today, my clients seem to experience difficulty attracting foreign investment, presumably because of geopolitical factors.
Over the next several years, I expect our tax system to evolve in ways that were unimaginable a few years ago.
Jim de Bree is a Valencia resident.