You all know that we have new tax legislation. This legislation is massive! Of course, it came out so late in the year that is was all but impossible to do any tax planning for 2017 and now we are in the throes of tax season filing under the old tax law while frantically trying to learn the new tax law. While in the long run, there will be some things that are simplified for some filers, there is plenty that got complicated pretty quickly. It is a huge change and we have only had a month in which to try and digest all of the changes and their implications. The regulations are not even out on all of it and we are in our busiest time of the year, so the timing of this new law could not be worse.
Republicans have said that under their tax plan your tax return could be filed on a postcard. That seems unlikely. But even if the IRS shrinks the 1040 you’d still need to check a bundle of instructions to fill it out.
I send this email to you for a couple of reasons: to give you some information on the changes and to let you know that being able to communicate to each client the impact is not an easy endeavor. The law is very fact intensive, has many exceptions and limitations and it is really a client by client determination about how the law affects you and what changes and strategies we might put in place for each of you. It is in no way a one size fits many kind of bill. The exceptions and limitations are of a kind that every client will need an intensive determination of facts before we can advise on changes you can make. The Qualified Business Deduction is a good example of this. It sounds great in concept, but it is a difficult fact pattern to develop and what is good for some shareholders/partners will not be good for others in the same company.
There is so much to this new law, so many changes that the only way I can think of communicating it is in digestible pieces: Today, the standard deduction, some itemized deduction changes and a couple of other comments.
Double the Standard Deduction: The plan does get points for simplification, experts say, by nearly doubling the standard deduction to $12,000 for single filers and $24,000 for joint filers.
Doing that would drastically reduce the number of taxpayers who itemize since the only reason to do so is if all your deductions exceed the standard deduction. This is great for certainly a lot of taxpayers, but the loss of the Miscellaneous 2% items will affect a lot of people who have unreimbursed employee expenses. The increase in standard deduction will not make up for all of those deductions that are now gone.
Home Equity Line of Credit Interest is no longer deductible!! Mortgages of $750,000 or more will be limited on the deduction. The deduction for state taxes is limited to $10,000. It is now more of a computation to determine if you itemize or take the new standard deduction. Those of you that claim expenses on Form 2106 for reimbursable employee expenses…you just lost that deduction.
To itemize, you have to keep lots of records to track eligible expenses, and then figure out if your income or other factors limit how much of a deduction you can take.
All in, roughly 30 million households that itemize today are likely to take the nearly doubled standard deduction instead. But of those 30 million, many “will still have to do the computations to see if they will itemize or take the standard deduction,” said Martin Sullivan, chief economist at Tax Analysts.
Earned Income and Child Tax Credit: Of course, deductions aren’t the only tax breaks with eligibility rules, income phaseouts and other mind-bending limitations. The GOP tax plan keeps, and in some cases expands, several tax credits. And just as under today’s code, the rules for them aren’t intuitive. The ins-and-outs of the Earned Income Tax Credit and the Child Tax Credit for instance, are complex and will remain so. The child tax credit did get doubled which will help many taxpayers with minor children.
Even if taxes were easy enough to file on a postcard, every line item on it would have pages of instructions and forms backing up the number you report, said Kathy Pickering, executive director of The Tax Institute at H&R Block.
Alternative Minimum Tax: Tax And let’s not forget the fact that the tax bill preserves the Alternative Minimum Tax for individuals. Yes, it reduces the number of people who would be hit by it by raising income exemption levels. But people will still have to figure out if they’re on the hit list. That requires calculating your tax burden twice — once under one set of rules, and once under a different set of rules — and pay whichever is highest.
What’s on the horizon of future emails from me? The Qualified Business Deduction…very complicated, the loss of the alimony deduction, the loss of the Qualified Production Activities Deduction. There is a lot to cover still. This is just one small section of what there is to know!!!
We are available for questions, but remember this new law goes into effect this year. We still need to get 2017 returns filed!