IRS Advisory: Prepaid Real Property Taxes May Be Deductible in 2017 if Assessed and Paid in 2017

Last two days to prepay and save your 2017 property tax deduction!

IRS Statement – Withholding for 2018

Hi there,

Today is small business Friday and I know you have questions. The fact of the matter is that while we know what the tax bill does, we do not know how the IRS will implement it.

What we do know:

  1. IRS will issue withholding guidance in January
  2. Employers are encouraged to implement the changes to withholdings in February

Everyone should be getting into their tax planners by February.

The Tax Bill and Vacation Homes

No more deducting interest on your vacation home

A common question this last week from my tax clients was how the tax bill would affect their deductions for their secondary (vacation) home. The answer, as always, is it depends. If you own the house out right, under the new bill, you can still deduct property taxes, combined with your primary home, up to $10,000. If you have a mortgage you could be in trouble. The tax bill does not allow for the deduction of interest on secondary homes.

what about home equity?

Many homeowners use home equity loans to not only improve their primary residence, but sometimes, to purchase a vacation home. Under the current tax code, homeowners can deduct interest on home equity loans, up to $100,000 principal balance. The new bill does  not allow for interest deductions at all.

How would the middle class fare under the Senate tax bill?

One key assessment is what happens to after-tax income. That’s a measure economists use to assess an income group’s well-being once tax changes are made, said Martin Sullivan, chief economist of Tax Analysts.
And it’s one way to measure how progressive tax changes would be. The more after-tax income rises for low- and middle-income households as a result of those changes, the better off they’ll be.
To see how middle-income and other households might fare under the Senate bill, CNNMoney calculated after-tax income changes using distribution tables created by the Joint Committee on Taxation, the nonpartisan tax scorekeeper for the House and Senate. – CNNMoney (New York) First published November 17, 2017: 5:17 PM ET

 


Here’s how the numbers break out from year to year:
In 2019: Every income group would end up with more after-tax income. Those making between $50,000 and $75,000 would see theirs rise by 1.3%, less than the 3% jump for those making between $500,000 and $1 million, or the 2.1% bump for households making more than $1 million.
In 2021: The $200,000 to $500,000 income group would do best, seeing a 2% rise in after-tax income. But those making $40,000 to $50,000 would only see a 0.5% bump. Those making $50,000 to $75,000 again get a 1.3% increase, just a little below the 1.5% jump in after-tax incomes for those making $1 million or more.
In 2023: The $30,000 to $40,000 band would see zero change while those making less would actually see slightly less after-tax income than they would if no tax changes were made.
Groups making $40,000 or more would have a little more money after paying Uncle Sam. But those who would enjoy the biggest bumps are those making from $500,000 to $1 million (2%) and those making $200,000 to $500,000 (1.6%).
In 2025: Those making $30,000 to $40,000 would see zero change in their after-tax income while those making less would see a less than 1% drop in their after-tax incomes.
By contrast, those making between $500,000 and $1 million would see a 2% jump.
And those making $50,000 to $75,000 along with those making more than $1 million would get less of a pop, at 0.8%.
In 2027: Every group would experience drops in average after-tax income or no change, except for those at the high end. Households bringing in $500,000 or more would see tiny increases of less than 0.5%. –  CNNMoney (New York) First published November 17, 2017: 5:17 PM ET

Stolen Refunds

How taxpayers can protect themselves

Tax season is one of the busiest times for identity thieves, but there are steps taxpayers can take to protect themselves. Here’s what CyberScout recommends:

  • Use a password-protected Wi-Fi connection when filing your taxes. Use a long and complex password — not just for your Wi-Fi but also for any accounts you’re using during the tax-filing process.
  • Get your return via direct deposit. If you must receive a return check via mail, have it sent to a locked mailbox.
  • Ask your tax preparer to use two-factor authentication to protect your documents and personal information.
  • Use an encrypted USB drive to save sensitive tax documents.
  • Never give information to anyone who contacts you by phone or online claiming to be from the IRS. The IRS will never contact you this way.
  • Monitor your accounts and online identity for any signs that your identity has been stolen. For example, if you see a sudden, unexpected change in your credit scores, it could indicate your identity has been stolen. You can easily get a look at your credit by using our free credit report snapshot, which is updated every 14 days.

Click here to read the full article.

Deductions for Individual Taxpayers

Last week we discussed the proposed tax rates under the new bill. This week we’ll take a look at deductions.


Standard deduction: The standard deduction would increase from $6,350 to $12,200 for single taxpayers and from $12,700 to $24,400 for married couples filing jointly, effective for tax years after 2017. Single filers with at least one qualifying child would get an $18,300 standard deduction. These amounts will be adjusted for inflation after 2019.

Deductions: The overall limitation of itemized deductions under Sec. 68 would be repealed, effective for tax years beginning after 2017.


Looks pretty good, right? Well, here is what you you are going to lose:

Personal exemptions: The deduction for personal exemptions, currently at $4,050 per person, would be repealed after 2017.

Many deductions would be repealed, effective for tax years beginning after 2017, including:

  • The Sec. 213 medical expense deduction;
  • The Sec. 215 alimony deduction;
  • The Sec. 165(c)(3) casualty and theft loss deduction (except for casualty losses associated with special disaster relief legislation);
  • The Sec. 212(3) deduction for tax preparation fees;
  • The Sec. 217 deduction for moving expenses;
  • The Sec. 220 deduction for contributions to Archer medical savings accounts (and employer contributions would no longer be excludable from income). Existing Archer MSAs could be rolled over tax-free into a health savings account.

Employee expenses: Under a new Sec. 262A, employees would no longer be allowed to take an itemized deduction for their expenses that are attributable to the trade or business of performing services as an employee. The above-the-line deductions for certain expenses of performing artists, officials, and elementary and secondary schoolteachers (Secs. 62(a)(2)(B), (C), and (D)) would be repealed. These provisions would be effective for tax years beginning after 2017.

Mortgage interest: The mortgage interest deduction on existing mortgages would remain the same; for newly purchased residences (that is, for debt incurred after Nov. 2, 2017), the limit on the aggregate amount of acquisition indebtedness would be reduced to $500,000 ($250,000 for married taxpayers filing separate returns), from the current $1.1 million. Also, taxpayers would be limited to one qualified residence for purposes of the mortgage deduction.

State and local taxes: The deduction for state and local income or sales tax would be eliminated, except that income or sales tax paid in carrying out a trade or business or producing income would still be deductible. State and local property taxes would continue to be deductible, but only up to $10,000. These provisions would be effective for tax years beginning after Dec. 31, 2017.

Please click here to read the full article.

 


What does all of this mean?

This bill is mostly going to negatively affect middle class Americans.

Let’s take a family of six, two parents and four qualifying children.

  • In 2016, this family would have six (6) exemptions worth $4,050 each. That is $24,300 in just exemptions.
  • The standard deduction in 2016 for joint filers was $12,600.
  • However, let’s assume that they itemize:
    1.  Washington Residents pay sales tax on goods – Assume this family paid $1,500
    2.  Real Estate Taxes – $6,000
    3.  Mortgage Interest – $12,000
    4. Charity Donation – $5,000
    5.  Tax Preparation – $300
    6.  Unreimbursed Employee Expenses – $1,000

In 2016, this family claimed $24,300 in exemptions and $25,800. That is a total of $50,100 off reduction of their taxable income. Assuming that this family made $85,000 in wages, this means only $34,900 is taxable. That means, under the current tax policy, they owe $4,302 in taxes, before any credits.

Now, let’s look at their tax liability under the new bill.

  • Exemptions = Disallowed
  • Standard deduction = $24,400
  • Itemized Deduction = $26,600
    1.  Sales taxes  = Disallowed
    2.  Real Estate Taxes (under $10,00, so allowed) = $6,000
    3.  Mortgage Interest – assume they purchased a new home and moved to Seattle where the average home costs over $750,000 – the expected interest on $750,000 30-year fixed mortgage is around $30,000 = Under the new bill, the deductible interest rate would be limited to around $15,600 for this taxpayer, due to the aggregate limit.
    4.  Charity Donations = $5,000
    5.  Tax Preparation = Disallowed
    6.  Unreimbursed Employee Expenses = Disallowed

Under this bill, this taxpayer and his family can only deduct $26,600 from their $85,000 income wages. This means that $58,400 is taxable as opposed to $34,900 from 2016. With the new tax rate at 12% for this family, their taxes under the proposed bill are $7,008, before any credits.

this family would pay on average $2,706 more Per year in taxes under the proposed bill.

What the House tax bill holds for individuals – Journal of Accountancy

Here is a great article posted by Alistair M. Nevius, J.D. at the Journal of Accountancy:

What the House tax bill holds for individuals – Journal of Accountancy

Below are highlights from the article:


 

Tax rates

Under the bill, individuals would be subject to four tax rates, instead of the current seven: 12%, 25%, 35%, and 39.6%, effective for tax years after 2017. The rates under the bill would be as follows:

Single taxpayers

Taxable income over But not over Is taxed at
$0 $45,000 12%
$45,000 $200,000 25%
$200,000 $500,000 35%
$500,000 39.6%

Married taxpayers filing jointly and surviving spouses

Taxable income over But not over Is taxed at
$0 $90,000 12%
$90,000 $260,000 25%
$260,000 $1,000,000 35%
$1,000,000 39.6%

Married taxpayer filing separately

Taxable income over But not over Is taxed at
$0 $45,000 12%
$45,000 $130,000 25%
$130,000 $500,000 35%
$500,000 39.6%

Heads of household

Taxable income over But not over Is taxed at
$0 $67,500 12%
$67,500 $200,000 25%
$200,000 $500,000 35%
$500,000 39.6%

Estates and trusts

Taxable income over But not over Is taxed at
$0 $2,550 12%
$2,550 $9,150 25%
$9,150 $12,500 35%
$12,500 39.6%

Capital gains: The bill would create three capital gains tax thresholds. Capital gains that would otherwise be taxed as ordinary income below the “15-percent rate threshold” will be taxed at 0%. Capital gains that would otherwise be taxed as ordinary income below the “20-percent rate threshold” will be taxed at 15%. Capital gains that would otherwise be taxed as ordinary income above that threshold will be taxed at a 20% rate.


 

Welcome Back

We know that a lot of clients and their businesses and families have questions about the new tax bill and what it is going to mean for them. To better assist everyone, we are starting back up our blog.

Here is what you can expect to find on our blog:

Mondays – Tax Updates

Tuesdays – Apps of the Week

Wednesdays – Credit Management Tips

Thursdays – Money Saving Tips

Fridays – Small Business Tips

Saturdays – Non-Profit Tips