Right before the holidays, as we all know, Congress passed the Tax Cut and Jobs Act, whose intent was to lower corporate and individual tax rates, but minimize itemized deductions thereby simplifying the tax code. First, it appears that Congress did not accomplish its original goal of simplifying the code as much as they want, but they did make it likely that fewer people will itemize their deductions going forward. However, what this does mean is that many of us in our area of the country with higher incomes will likely pay more in taxes this year and for the next few years. Despite all the panic in the media, here is my take on what I know of the law that may affect people in our area, knowing that technical corrections can still take place. None of this should be taken as advice, contact your tax advisor.
Tax brackets are going down. Couples with taxable income less than $315,000 will have a marginal tax rate of 24%, compared to 33% for that income level last year.
Deductions are more limited. One of the most highlighted features of the plan is the limiting of state, local, and property tax deductions. Also, for new loans, the cap on deducting mortgage interest is $750,000 vs. $1,000,000. Either way, for property owners in our area, this has been a key element of home affordability. While no one has discussed this, I would expect that this would affect the price of your home or apartment. In Manhattan, I believe that the value of a mid-level Manhattan apartment could drop 5-10% as the net carrying cost of an apartment could rise by that amount. Interest on home equity loans will no longer be deductible.
The Alternative Minimum Tax (AMT) limits are higher. Originally, Republicans and the President wanted to get rid of the (AMT) altogether. However, this law increases the AMT deduction and slows the phase in. Fewer taxpayers will be caught by the AMT than in years past.
Business owners get a 20% discount on their taxes. However, this will only apply up to incomes of $157,500 (single) or $315,000 (married). This will actually incentivize middle income employees to go out on their own or ask to be classified as an independent contractor so they can benefit from this tax break. Check with your tax advisor on how this new portion of the tax code affects you, your business, and your taxes.
529 College Savings plans can now be used for primary and secondary school education instead of just college education. This provides an opportunity for those who educate their children through independent schools to use funds for this purpose and perhaps avoid state taxes. According to my accountant, you can use this for religious school as well.
Right now, with the late date of the passage of this law and the difficulty in implementing the necessary changes, I would expect 2018 to be a strange year for many as systems catch up to be able to operate under this law, so expect lots of communication in the months to come from your company or tax advisor. If there is one piece of advice I can give you in this blog as to how to proceed, it is that it is likely worth it to ask your tax advisor to prepare what is called a “pro forma” return using your 2017 numbers so you can estimate the changes in your tax liability as you go forward and see if there are any changes you can make. After getting those pro forma returns, whether it be now, April, or later, call or email us so that we can help you adjust your long-term plans to your new tax reality.