Making sense of the new tax law, AKA: The Donald giveth and The Donald taketh away - Roger Bennett, CPA
Regardless of your income level, occupation or residency, it is one confusing mess trying to figure out who the winners and losers are and even what certain parts of the tax law mean. But let’s try and do the best we can for you here.
Deductions & Credits:
As you probably know, you can deduct either the total of your medical expenses, state and local taxes, mortgage interest, charitable contributions and employee business expenses (your itemized deductions) or a standard deduction amount, whichever is greater.
Giveth: The standard deduction has been increased to $24,000 for married people and to $12,000 for singles, representing an approximate double from the old law.
Taketh: However this change is temporary and expires in 2025.
Taketh: While this standard deduction was increased, for those of us who have enough deductions to itemize, the new law limits the deduction for taxes (real estate, auto and state income) to only $10,000, an amount much lower than the total most of us currently pay and deduct.
Taketh: Also eliminated were non-reimbursed business expenses of employees, the amount you pay your financial advisor and most sadly of all, the amount you pay your CPA for preparing your tax return!
Taketh: While increasing the standard deduction amount, the new law takes away the $4,000 personal exemption for each member of your household.
So let’s stop and consider. If you have enough deductions to itemize, you just lost the
deduction for taxes you pay in excess of $10,000 per year and if you are a family of four
you just lost the $16,000 of personal exemptions you received in 2017.
Taketh: There’s a bit of change in the mortgage interest deduction in that for new loans taken out after 2017 you can only deduct the interest on up to $750,000 of mortgage debt and they have completely taken away the deduction for interest on home equity loans.
Giveth: If you are a high earner, basically those earning in excess of ¼ million, the former phase out of itemized deductions (AMT) is repealed.
Giveth: If you are not a high earner, the child tax credit has been increased significantly and almost doubled the amount you can earn before you become ineligible.
Taketh: To exclude the gain from the sale of you primary residence, you must now own and use your home as your principle residence for 5 out of the last 8 years rather than 2 out of 5 years.
Taketh: Make sure to treat your spouse extra nice this year because starting next year anybody getting divorced will not be able to deduct alimony as they were always able to in the past.
On average the individual income tax rates are going down two to four percentage points, so that should save everybody a healthy bit of money. If you make $150,000, that will equate to a $3000-$6000 reduction in your tax, which is very significant. Except, unless peculiarly, if you were unfortunate (or fortunate, depending on how you view it) enough to have taxable income between $400,000 and $417,000 your tax rate it is actually going up two percent! (Maybe all the Democrats earn in this range?)
Giveth: For those of us who are in our own businesses, there is a fair amount of good news here. If you are one of the few dinosaurs that are still organized as a C corporation, the top tax rate was reduced from 35% to 21%.
Most of us, however, operate as either sole proprietors, LLCs or S corporations. Basically, the new tax law states that we can just lop off 20% of our gross income (sales) and basically not report them. So this means your net taxable income for your business will be reported using only 80% of your sales. But this is the federal government after all, so there are zillions of provisos, footnotes and asterisks. Basically, this deduction cannot exceed 50% of the wages your business pays. However, the proviso to the proviso is that if your taxable income is less than $315,000 ($157,500 for single individuals) then you can ignore the 50% of wages paid limitation when calculating the 20% reduction of sales.
Confused? So were the guys who wrote the stuff I think.
Taketh: if you are an attorney, a doctor, a financial advisor (sorry Jay) or a CPA (sorry Me) or a few other professionals you can forget about this deduction all together. Unless, again, you make under $315K/$157.5K and then you are OK.
Giveth: (For the wealthy) The amount that an individual can leave to their heirs has basically doubled to $10MM.
Final thoughts: Was it the tax simplification that the Donald promised us, I think not. Will it be good for the country? Only time will tell.
Roger Bennett is the managing partner of Bennett & Company CPAs, a 10 person CPA firm located in Bloomfield Connecticut. The firm specializes in middle to high net worth individuals and small businesses, offering creative and aggressive tax planning techniques and overall business consulting.
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