Tax Changes Updates
Updated: 12/28/2017 1:58PM EST
Hey to all my clients and others,
As you most likely know, the biggest tax law change in 30 years is about to become law and I wanted you to know the details and how it affects you … But I want to tell you in the Gregg Bossen way! This means I wanted to make it sweet and easy to understand how it will affect you. This is such a BIG change that the article is sort of long. PLEASE READ IT ALL! It’s easy to understand, I hope and will make you seem smart at parties. Here we go…
- Although the bill will be effective beginning 2018, please understand that this means the changes WILL NOT AFFECT YOUR 2017 RETURNS. So when you see me this year to do your 2017 taxes, the new law won’t change anything on your 2017 return. Make sense?
- As such, there is not much you should do right now but….One thing I would advise immediately is to make sure your state property taxes for 2017 are paid before year-end. This is because you may lose the ability to deduct some of those taxes if you wait and pay them in 2018. Now if your mortgage company pays them on your behalf then I’m sure it’s been paid. But if you pay them yourself – PAY YOUR 2017 HOME PROPERTY TAXES BEFORE 12/31/2017. This is assuming that you don’t actually pay Alternative Minimum Tax also known as AMT (see the paragraph below regarding what the hell Alternative Minimum Tax is.) If you are one of the few who pays this tax then you can’t deduct property taxes anyway so forget about paying 2017 property taxes by year-end. If you don’t know whether you typically pay AMT, it’s likely you don’t as I would have told you when I did your taxes last year.
- The bill does not make tax law simpler. It actually adds 1097 pages to the tax code. Now since it removes some itemized deductions and doubles the standard, more people who used to itemize will be using the standard going forward which will make completing the return easier for those people.
- In general, most taxpayers will see a decrease but some of you will see an increase. So much has changed it is difficult to see the actual impact on you specifically until the IRS has flushed out specific regulations in more detail. Even then, the only way to know for sure is to run your 2016 return using the new rules. Give me a call if you’re are curious and I’ll be glad to run the numbers for you.
- While it is true that the individual changes expire after 2025, and the corporate changes are permanent, I doubt very seriously that they will not extend the individual changes when they are set to expire. Consider them basically permanent as well. Until the tax law changes again of course.
And now for the changes. Read on…
SPECIFIC CHANGES FOR INDIVIDUALS:
- INDIVIDUALS – Rate change:
o Meaning: The rate change is minor for individuals and there are bigger changes that make much more of an impact. Unless you are making over $500,000 annually, this isn’t a big change. (If you’re making around $225,000 to $425,000 as a single guy – yours may go up a little). Don’t focus on this. It’s no biggie.
- INDIVIDUALS WHO MOVE FOR A JOB:
o New Rule: The ability to deduct moving expenses over 50 miles for a job is GONE.
o Meaning: Well, obviously this sucks. LOL. I’d say try and get your future employer to cover the cost because they may still be able to deduct it.
- INDIVIDUALS WITHOUT EMPLOYER-PROVIDED HEALTH INSURANCE:
o New Rule: The “Individual Mandate” rule that required those who didn’t obtain health insurance to pay a penalty is GONE.
o Meaning: If you decide not to get health insurance you won’t have to pay a penalty when filing your return. To be honest, few people who were supposed to pay the penalty did so and the IRS had a tough time catching it. The real effect of this though is to deal another body blow to Obamacare because the private Insurance companies will continue to pull out of the exchanges. For 2018, in Georgia, the only two companies left are Ambetter, which sucks, and Kaiser. Most are going with Kaiser. With the new influx of patients, Kaiser finds itself without the doctors to handle the increased demand. Expect to wait for appointments. Sorry guys.
- DIVORCED PEOPLE PAYING OR RECEIVING ALIMONY:
o New Rule: Currently the person paying Alimony can deduct it and the person receiving it must add it to their taxable income. The new law removes this. In other words, if you pay alimony you can no longer deduct it which sucks. If you receive alimony you no longer have to pay taxes on it which is great for you.
o Meaning: Basically this means that people who pay alimony are screwed. Personally, I think this is unfair. If you pay alimony, you are transferring income to your ex-spouse. The current law effectively allowed you to transfer the tax on that income to your spouse, the person who ultimately received that income. This was fair. Now you will be transferring the income through alimony AND paying the tax on that transferred income. My guess is they did this because the person paying the alimony makes a lot more money and is in a higher tax bracket than the recipient. By making the payer pay tax on the alimony paid instead of the recipient, the government will get more tax. If you are getting a divorce I recommend adjusting the alimony down to reflect this effect.
- INDIVIDUALS WHO DON’T ITEMIZE BUT USE THE STANDARD:
o New Rule: If you take the Standard Deduction (most people who rent their home instead of owning find it better to use the standard instead of itemizing) it has almost doubled in amount – from $6,500 for single to $12,000 and from $13,000 for couples to $24,000. This is good …but…
o New Rule: The personal exemption ($4,050 a person) that has been around over 100 years has been REMOVED! It’s gone! Don’t know why no one is talking about this but it’s a big deal.
o Meaning: If you take the Standard Deduction your benefit is not that big because while the Standard went up, the personal exemption removal lowered it back down some.
o Single with no kids: Net additional Deduction of $1,450 (save around $325)
o Married with no kids: Net additional Deduction of $2,900 (save around $650)
Now, if you have kids then taxes actually get worse…
o Single with 1 kid: Net increased taxable income of $2,600 (costs around $700)
o Single with 2 kids: Net increased taxable income of $6,650 (costs around $1,400)
o Married with 2 kids: Net increased taxable income of $6,200 (costs around $1,300)
But don’t worry. To fix this issue…
o New Rule: The Child Tax Credit has been increased from $1,000 per kid to $2,000 per kid and the income amount above which the credit phases out has been substantially increased This is a straight tax dollar for dollar benefit so every kid you have gets you an extra $1,000 in tax savings or refunds!!!!
|CONCLUSION FOR THOSE WHO USE THE STANDARD DEDUCTION:If you have no kids – you will see a savings of a little bit (average of $500)If you have kids – the more you have the more your savings will be (say $700 a kid)|
INDIVIDUALS WHO ITEMIZE :
o New Rules: Most people, who own their home instead of renting, find it better to itemize their deductions instead of taking the standard. Now you can still itemize but the following itemized deductions are gone or lowered…
o Unreimbursed Employee Business expenses are GONE. If you travel a lot with your job and/or work from home…..all of your car, phone, and office-in-home deductions are GONE if you are an employee. (If you work for yourself you can still take them).
o Investment Fees deduction is gone. For those that had high fees with a money manager – it’s GONE Not many people do as only the amount over 2% of Income was deductible anyway.
o Property Tax and State Withholding are still around but capped at $10,000 for both added together. If you make more than $100,000 as a household and pay around $4,000 or more for property tax your deduction will probably go down a bit.
o Mortgage Interest deduction is capped at $750,000 of loan. This means that if you paid $20,000 interest on a $1,000,000 loan, only the interest paid on the first $750,000 is deductible or $15,000 ($20,000 x $750,000/$1,000,000 = $15,000). Not many have a mortgage for more than $750,000 so few will be affected here but with the Atlanta real estate market blowing up, some certainly will. This is only applicable on NEW MORTGAGES. So if you currently have a mortgage on your home over $750,000 you will still be able to deduct all of the interest up to $1,000,000 of the loan (current law).
o Home Equity Loan (HELOC) Interest deducibility is GONE. These are loans people have been getting against their homes where you can take money whenever you need from it and do whatever you want (home improvements, pay off credit cards, buy a car, join a drug cartel, etc…). Now, this is not to be confused with a refinance of your mortgage or a second mortgage where they give you all the loaned money on the day of closing. Those loans are still deductible. Now the interest on HELOC’s isn’t usually that much but it won’t be deductible anymore so it’s best to pay those things off as quickly as possible because your interest rate effectively has increased on them. In the future, it may be best to refinance and take money out rather than a HELOC depending on what your current interest rate is on your main mortgage and what rates are at the time when you refinance.
o Meaning: Those who itemize, may see a small increase in taxable income and it may even be better for them to begin using the standard. Again though, just like with those who take the Standard, if you have kids, things are better because the Child Tax Credit increase to $2,000 and should result in lower taxes.
o New Rules: Just like with those who don’t itemize (covered earlier) …
o The $4,050 personal exemption is gone which will increase the taxable income yet again but this is okay because you have kids…
o The Child Tax Credit has been increased to $2,000 a kid
|CONCLUSION FOR THOSE WHO USE ITEMIZED DEDUCTIONS:If you have high property taxes and make over $100,000 as a household, your taxes may go up but not by much, and if you got kids you should end up around the same or better off.If you are an employee with a lot of un-reimbursed auto and office in-home expenses – expect a tax increase unless you have a lot of children.|
- INDIVIDUALS and STATE TAXES:
o New Rules: There IS NO NEW RULE as far as the states are concerned. At least not yet. What the states are going to do remains to be seen but many states, like Georgia for example, mostly mirror whatever the Fed rules are with two notable exceptions
- The GA standard deduction is way less than the Federal one. ($2,300 for singles and $3,000 for couples) and if you use the standard on your federal return GA requires you to use the lower GA standard for the state. Although this has sucked in the past, the new fed standard deduction doesn’t change the state standard deduction (i.e. It still sucks but no more than usual) so this won’t change your state tax owed at all. Unless GA raises its standard deduction. I wouldn’t hold your breath on that one.
- GA has always had a personal exemption although again it’s a few hundred dollars lower than the feds was ($2,700 for singles and $3,700 each for couples). Now that the Fed’s is gone, will Georgia remove theirs as well? I hope not. I don’t think they will.
o What if you Itemize for feds? Well as I said before, GA mirrors the Fed’s, so pretty much whatever the Fed lets you deduct is what Georgia does. But as you now understand some of the Federal Itemized deductions are now gone. Does that mean they are gone for the state as well? Well unless Georgia changes something, the unfortunate answer is YES.
o Meaning: If you itemize in the past, you’re likely to see state taxes increase. Notice how unless Georgia changes their tax law, they will effectively take on the parts of the Federal law that increases your taxes (lowering itemized deductions) but reject the parts of the Federal law that decreases your taxes (new doubling of the standard deductions). Neat trick huh? My guess is, as strapped Georgia is for cash, they will do nothing, get more tax revenues, and be able to blame the Feds for the change. If you aren’t living in Georgia, call me and let’s talk.
|CONCLUSION FOR GEORGIA TAXES ON INDIVIDUALS:If you have always taken the standard deduction for Feds, your Georgia taxes shouldn’t change – unless they change the law.If you have been itemizing on your federal return and continue to do so, your Georgia taxes will likely go up but not by much since the Georgia Income tax rate caps at 6% – again, unless they change the law.If you have been itemizing on your federal return and it turns out better going forward to use the standard for Federal taxes, your Georgia taxes will likely go up a chunk because you will have to use Georgia’s tiny standard deduction now ($2,300 for singles, $3,000 for couples vs. the fed’s new $12,000 for singles and $24,000 for couples. ) – again, unless they change the law.|
- INDIVIDUALS PAYING ALTERNATIVE MINIMUM TAX (AMT):
Okay, while most people think there is only one tax law system, there are actually two tax law systems. There’s the one that you know all about and then there is a second one called Alternative Minimum Tax. As the name suggests this is a separate tax law that tries to limit how low a taxpayer can go in avoiding taxes. The rules of AMT are messy and to be frank few accountants even know them. We mostly rely on our tax software to tell us. Basically, the way it works is every tax return is run using the regular tax law and then again using the AMT law and if the AMT tax liability is larger than the regular than the taxpayer pays the higher AMT tax. Now few people have paid this in the past but that number is growing. Now as far as how AMT works, it’s basically the same as regular tax law with a few changes. State taxes paid, personal exemptions, and unreimbursed employee business expenses can’t be deducted. Instead, a flat deduction amount is taken and then the taxable income is taxed at a flat rate of 26% or 28% depending on your income.
o New Rule: So the flat deduction amount has been increased.
Meaning: The above change when coupled with the fact that as I covered earlier in regular tax law, the state tax deduction has been capped and the unreimbursed employee business expense and the personal exemption has been removed. All this means the number of people having to pay AMT will decrease substantially. Not sure that this is good though because people in AMT in the past will be the same people that will see an increase in regular tax because the deductions they have been using (state tax, employee exp. and personal exemptions) have all been removed from regular tax
- INDIVIDUALS WITH EDUCATION IRA’S 529 PLANS:
These are accounts that people can put money in each year to save for college for their kids. There has never been a federal tax deduction for this (there is a small GA tax deduction). The main benefit has been that the earnings grow tax-free.
o New Rule: In addition to taking the money out for college, now you may also take up to $10,000 a year for private elementary or secondary school. Major win for charter school advocates.
o Meaning: Not much in my view. This means you’d be taking the money out much earlier than for college. This means less time for the money to grow and less money for college. My advice is to keep the money in there until college. Don’t worry, you’ll use it all. Unless they don’t go to college, in which case you will surely be furious after sending them to private elementary school.
SPECIFIC CHANGES FOR BUSINESSES:
- C- CORPORATIONS (PROBABLY NOT YOU):
o New Rule: Top tax rate falls from 35% to 21% ( Not S-Corps – Only C-Corps)
o Meaning: Very few small businesses are C-Corps. Most are S-Corps. The few C-Corp small businesses out there don’t typically run a profit. The only taxpayers affected are big corporations who will mostly use the savings to buy back shares of their stock driving up the price. Good for your 401-K’s. In case you’re wondering, it still is NOT a good idea in most cases to convert your business to a C-Corp. You will end up being double taxed. Once at the corporate level and then again when you take the money out.
- OTHER BUSINESSES (S-CORPS, PARTNERSHIPS, LLC’S AND SOLE PROPRIETORS):
o These businesses don’t pay tax. Rather the Net Income is put on the owner’s Individual tax return and taxed there at the Individuals rate (Higher than corporate rate)
o New Rule: If you are a product based business (e.g. selling widgets) 20% of your Net Income isn’t subject to Income tax. (It may still be subject to the 15.3% self-employment tax). This means that if your business netted $100,000 you’d only pay tax on $80,000. ($100,000 – 20% of $100,000 = $100,000 – $20,000 = $80,000). This is an attempt to give you guys a break like the big C-Corps are getting. This deduction is limited to 50% of wages paid by the business to employees other than you (or 25% of wages paid plus 2.5% of purchases of buildings and building improvements). In other words, you basically don’t get the deduction if you don’t have employees.
o New Rule: If you are a service-based business (Attorney, Consultant, Accountant, etc.. )
You still get the 20% deduction unless you make more than $157,000 as a single filer ($315,000 for married couples) in total income from all sources (not just your business). Then the benefit phases out. Just like with the product based businesses, the deduction is limited to 50% of wages paid by the business to employees other than you (or 25% of wages paid plus 2.5% of purchases of buildings and building improvements). In other words, you basically don’t get the deduction if you don’t have employees.
o Meaning: If you are a product based business or a small service-based business not making a lot, and you pay employees – be happy! This will help your bottom line tax liability. Rough guess of the benefit would be around 5% of your net income from your business. So if your business has net income of say $100,000 you’d save around $5,000 a year in taxes! If you don’t have employees, no deduction for you.
- Meaning: If you are a service-based business and your household makes a ton money, you’re out of luck. If you have a small service business that doesn’t make much, but your spouse has a huge W-2 – no soup for you!!!
If you are wondering if you are a service-based business or perhaps you do both products and services, so is everyone else. This is where the IRS will have to flush out guidance but you can bet there will be court cases on this at some point. It may actually be a good idea to split out the product portion of your business into its own entity. Below is a list of service based businesses that are subject to the limitation on deduction.
- SERVICE BASED BUSINESS EXAMPLES AS DESCRIBED IN LAW
- Consultant (whatever that means!)
- Any Health Service (Doctor, Dentist, Chiropractor etc…)
- Performing Arts
- Any Financial Service (Broker, Agent etc…)
- Any Trade or Business where the principal asset is the “reputation or skill” of 1 or more employees (here’s where most of the court battles will occur I’m sure.)
Let’s see what happens here.
|CONCLUSION FOR BUSINESS OWNERS:Product Based Businesses with employees can rejoice. You will save around $500 for each $10,000 of net income (after your business write-offs)Service-Based Businesses with employees can also get those $500 savings unless your household income is over $157,000 and your single or $315,000 if you’re married. Then it will dry up after around $50,000 more of net income ($100,000 for couples). We need to see what the IRS has to say about what a service based business is.If you do both Products and Services in the same business it may be worth splitting them up but again let’s wait and see what the IRS says about the matter.|
That is it! Thanks for reading it through and I hope it helped. Feel free to reach out with questions. Have a great holiday and I’ll see you next year.
If I don’t do your taxes currently, give us a call. If nothing else I’m very entertaining.