With April right around the corner, and with the first significant tax reform passed since Reagan’s in 1986, taxes are on everyone’s mind. With good reason, as its implications could be significant, depending on your profile.
We thought we would take the time to outline the specific changes at play. Note: this may be worth a forward to family and friends considering buying and selling real estate in 2018. Importantly, as you may imagine, none of the below will affect you when filing 2017 taxes as the new laws will be first applied in 2018 (filing in 2019).
*Please note that the opinions below are derived from our team brainstorming and analyzing together — the final outcome from these tax cuts is still under consideration and consulting a tax specialist remains the best route to take while tax planning.
So let’s take these changes one by one, and see what’s in store:
- SALT deduction gets salty: The existing state and local tax deduction, or SALT remains in place for those among you who itemize your taxes, however with a $10,000 cap. As of this new bill, real estate taxes are now grouped together with SALT, and thereby also capped at $10,000. Previously, you could have deducted an unlimited amount for state and local property taxes, in addition to income or sales taxes; alas, no longer (which has Albany scrambling to create fixes or legal loopholes to bypass this material added burden for coastal blue states, including classifying taxes as charitable gifts … stay tuned on this front)
- Lower mortgage interest deduction: Those of you who already own a home, you’re in the clear and grandfathered in. The new home buyers among you will only be able to deduct the first $750,000 of your mortgage debt, down from $1 million previously.
- No more deducting moving expenses: You won’t be able to expense your U-Haul costs if you relocate for work (did anyone do that?) TBD on whether exceptions will be made for the military.
- The corporate tax rate is coming down: The corporate tax rate has been slashed from 35% to 21% starting in 2019 – that’s material and has prompted many to call foul. The alternative minimum tax for corporations has been thrown out altogether, prompting many to call a double foul. The greatest impact will likely be on stock holders, as earnings are expected to go up as a result of these corporate goodies; lots of debate exists around how much this additional wealth will make its way to employee salaries, if at all.
- The endangered species of the estate tax: Prior to this tax bill, a paltry number of estates were subject to the estate tax, with the first $5.49 million being exempt for individuals and a whopping $10.98 million of transferred assets exempt for married couples. Now, those thresholds have doubled at $10.98 million for individuals and $21.96 million for married couples … so who exactly will be paying this?
- Pass-through entities will also get a break: Pass through entities, meaning owners, partners and shareholders of S-corporations, LLCs and partnerships (who pay their share of the business’ taxes through their individual tax return) will now benefit from a 20% tax deduction. Although the legislation includes a rule to ensure these owners don’t game the system, tax experts remain concerned about abuse of this provision.
- AMT minimized: The Alternative Minimum Tax came about from the intention to ensure that people who receive lots of tax breaks still pay some federal income taxes; since, it’s ensnared many W2 filers, accused of taxing working income far more heavily than investment income (aka the truly wealthy). While the AMT will remain in place for individuals, fewer people will have to worry about calculating their tax liability under the AMT moving forward, as the exemption has been raised by $70,300 for singles and $109,400 for married couples.
- Tax bracket simplification? Not quite: Americans will continue to be placed in one of seven tax brackets based on their income, but the rates have been lowered: 10%, 12%, 22%, 24%, 32%, 35%, 37%. While individual provisions in the new legislation technically expire by the end of 2025, many people “in the know” expect that a future Congress won’t actually let them lapse.
- Doubled standard deduction: Lawmakers want fewer people to itemize their taxes and so they’ve doubled the standard deduction. Single filers’ deduction has increased from $6,350 to $12,000 and joint filers’ from $12,700 to $24,000
- Bye bye personal exemption: No longer can you claim $4,050 personal exemption for yourself, your spouse and each of your dependents to lower taxable income.
- Bye bye alimony deduction: Alimony payments codified in divorce agreements for ex-spouses who earn less money are no longer deductible for the payer. This provision will apply to couples who sign divorce or separation paperwork after December 31, 2018 so … hurry up and get divorced??? That feels like an off recommendation.
- Homeowner loss deductions toughened: Losses sustained due to a fire, storm, shipwreck, or theft that aren’t covered by insurance were deductible if they exceeded 10% of your adjusted gross income. Now through 2025, you can only claim that deduction if you’re affected by an “official national disaster” … hmmmm. It makes you hope that if your house is destroyed by a fire, it’s by the California wildfires and not little Johnny playing with some matches.
- Lower inflation adjustments: The new legislation uses chained CPI to measure inflation, a slower measure than previously used; over time, this will raise more money for the federal government, but deductions, credits and exemptions will be worth less.
- Homeowners’ profits unchanged: Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) of capital gains.
Phew! Quite a list. We hope this is a helpful compilation of the new tax legislation for you and those dear to you. We’ll keep you updated on any updates to these changes or related information as it all unfolds.