Thanks for ignoring the Grim Reaper and reading this post. As an IRS employee, he has no interest in letting you know that, according to the Wall Street Journal, 91% of taxpayers will pay less in 2018. The tax act is 500+ pages. Covering all of it in a few paragraphs is impossible. However, here are the provisions that should interest many of our clients and friends. First, the bad news:
Starting in 2018, state and local taxes will no longer be fully deductible as itemized deductions. You will be limited to deducting a maximum of $10K in state and local taxes. Can you prepay 2018 state and local taxes in 2017 to get the deduction in 2017? Yes – sort of. First, you can only prepay property taxes, such as real estate and personal property taxes. You cannot prepay 2018 income taxes, but more on that later. Second, the tax jurisdiction must allow for the 2018 prepayment. Right now, this is county by county and the counties allowing prepayment are changing by the day. Some are requiring you to prepay in person before year end. So just mailing a payment by the end of the year may not work. Contact your local Grim Reaper (County Treasurer) to be certain.
The IRS just issued new guidance on prepaying property taxes. Please see our latest post for details.
If you can’t prepay your 2018 state income taxes, you can at least make certain you owe no state taxes for 2017. So please, make your final 2017 state estimated tax payment by the end of the year. The payment must be postmarked no later than December 31. Also, if you overpay a little for 2017 (wink, wink), that’s not a bad thing. You can apply the 2017 refund to 2018. Of course, we don’t recommend going too far with this recommendation. This follows the old adage that pigs get fat. Hogs get slaughtered. Overpaying 2017, like drinking adult beverages, works best in moderation.
If you are subject to alternative minimum tax in 2017, prepaying taxes will give you no benefit, but it also won’t harm you. All in all, I think it’s a decent bet.
Finally, the IRS could write rules that later disallow all of this. But at this point, prepaying is worth considering, given the above.
More bad news. Unreimbursed employee expenses will no longer be deductible for 2018. These are the expenses that your employer will not pay, and that you must pay personally. Pay as much of these expenses as you can in 2017.
Deductions for businesses have not gone away, but entertainment is no longer deductible beginning in 2018. The Redskins haven’t been that entertaining anyway.
Some more bad news – the mortgage interest deduction is being cut back starting with mortgages that originate in 2018. Mortgages from 2017 and earlier are OK. The mortgage interest deduction for mortgages after 2017 will be limited to interest on the first $750K of mortgage debt. Interest on home equity loans, not used to improve your residence, will no longer be deductible. Again, existing loans are fine.
The mortgage interest deduction for rental properties or business real estate has not changed.
Now for some good news. Most people will see a 3% reduction in federal income tax rates. This ensures that most of our clients, but not all, will have lower taxes under the new bill.
Also, the standard deduction has nearly doubled to $12,000 for individuals, $18,000 for head of household, and $24,000 for married joint filers. As in the past, if your itemized deductions exceed your standard deduction, you will still be able to itemize. Contributions to charity are still deductible, if you are able to itemize. While the standard deduction is increasing, there is some bad news in that the tradeoff is that the deduction for personal exemptions (for living breathing human beings) is gone.
However, the child tax credit has been increased to $2,000 per child. It now begins to phase out at $200K in income compared to $100K under prior law. Many of you will benefit from this change.
Arguably the biggest change for our business clients is the new 20% deduction for business income from pass through entities. A pass through entity is defined as an S corporation, partnership, or sole proprietor. LLC’s treated as either S corporations or partnerships are included in the definition.
Unfortunately, this new business deduction is really complex and has a lot of caveats. CPA’s, doctors, lawyers, and some other professions are subject to limits based on total income. Yes, it sucks to be me for this one.
Finally, C corporations are subject to a new maximum tax rate of 21%. Does this mean you should change your S corporation to a C corporation? We have no idea. We can determine this with you on a case by case basis. Each situation will be different, and we’ll need to run real numbers to be sure.
This year, when we prepare your 2017 income tax return, we can calculate how the new tax law would change your results if your income and deductions do not change from 2017. We hope conversations will begin around planning for 2018 and beyond. We will prepare this analysis for a minimum charge of $250. If we go beyond just the basic calculation, additional charges may apply, and they will be worth it. This is a lot of extra work for us, but we’re more than certain of the value – especially for business owners.
There are many, many more provisions in the new law. I have tried to cover a few that people have called and e-mailed me about. If you have any questions, please contact me at firstname.lastname@example.org or call at (703) 818-8284.
Thanks for reading and ignoring the Grim Reaper!
Frank Stitely, CPA, CVA