There’s a lot to like in the changes Congress made to the nation’s tax code last month. But, advisers say, there are some things that warrant caution ahead.
Higher standard deductions. Lower tax brackets. Bigger child tax credits. All are elements that earned most of the attention in December, when Congress signed off on the most significant reform of the nation’s tax code in more than three decades.
But buried in more than 560 pages of legalese are some key elements that didn’t receive nearly the same level of attention, though they will be of keen interest to taxpayers who sit down to figure out their obligations a year from now.
Perhaps the bottom line on tax reform, is this: Be of good cheer. Ben Hake, tax director for Leawood-based Creative Planning, said that the firm’s analysis of various scenarios suggests lower tax bills for people as high as the bottom tier of the much-maligned “1 percent.”
“We’ve run scenarios for quite a few of our taxpayers, and for most of our clients who have incomes of $250,000 to $400,000, I would say the majority are seeing a benefit under this tax bill,” he said. “They basically shaved the rates across the board, dropped them 2-3 percent, but even with the loss of some deductions, when you’re getting an extra 2 percent on a $300,000 income, it adds up quickly.”
Congress has definitely simplified things for the standard wage-earner with an investment account. But, Hake said, “where they muddied things is for the small business that qualifies for the pass-through. It’s simple with a relatively low income, but once you get to the successful mid-size business, there are so many different tests and vague criteria, it really depends on the individual situ-ation.”
Here, then, are a few additional things, and some clarifications of numbers floated during the sausage-making process, that you should know about the tax-reforms:
The AMT Lives. Not for corporations, perhaps, but for individuals, it does. SOME individuals that is: While the measure—reviled by middle-class taxpayers caught in a grinder intended for high-income tax avoiders—wasn’t entirely eliminated for individuals, it lost much of its bite. Come next year’s filing time, fewer people will be caught up in the AMT’s oversized net.
The last time the AMT was significantly addressed, in the Reagan administration, the goal was to make sure that high earners didn’t skate on taxes, given the ample numbers of exemptions and credits available to them. But Congress, in its infinite wisdom, did not index the AMT exemptions amounts to inflation. Result: as incomes rose—though purchasing power didn’t—more people were caught up in the AMT. Tinkering with it a few years ago still didn’t reach the goal of exempting the middle-class victims.
This time around, Congress increased the AMT exemption levels, further reducing the pool of potential prey. But only your accountant will be able to decipher whether you won’t be snared again starting next year.
“We think it’s going to be difficult for almost anyone to get hit by the AMT,” Hake said, largely because of the phase-outs that go along with those reforms.
Personal Exemption Going Away. For the 2017 filing year, you can claim the $4,050 exemption for every member of the household. Starting next year, that goes away, ostensibly replaced by the much higher standard deduction, $12,000 for individuals and $24,000 for joint filers. That’s a good deal for a lone taxpayer who can claim the $6,350 standard deduction and the personal exemption, but a bad deal for the parents of, say, four kids who used to rack up $16,200 in additional exemptions. The tax bill sought to address that by increasing the value of child-tax credits, raised from $1,000 to $2,000, subject to phase-outs, and refundable up to $1,400.
State/Local Income Taxes: Live With ’em. If you were savvy enough to think of pre-paying 2018 state and local income taxes in the expectation that you could still benefit from that deduction next year, think again. Congress kicked the legs out from under that strategy as it crafted its limitations on state and local tax deductability. Oh, you can still deduct some—but only up to a total of $10,000 a year, a measure that will smack high-tax states much more than others, and especially more than others with no state income tax.
Property taxes? Deduct ’em! Only a comparative handful of homes in the Kansas City region will get hurt by the $10,000 ceiling Congress imposed on property taxes starting next year. The full deduction still applies for you as you file the 2017 return, but most taxpayers won’t feel any pinch when that line item goes away in 2018.
Moving in 2018? You’re Late. The moving expense related to a job change has gone away starting in 2018. Only those who made the move in 2017, and at least 50 miles at that, for 39 weeks of the year following the move, will be able to capture the value of this break. Starting next year, forget it.
Mortgage Interest Pains. If you owned a home before Dec. 15, you can deduct up to $1 million of mortgage debt; for purchases after that date, that deduction is capped at $750,000. Not chump change, but a lot better than the goose-egg that will apply on interest paid for home-equity loans: Those go away after you file your current return, unless the proceeds go directly to home improvements.
Etc., etc. To pave the way for the higher standard deductions people will be able to claim on next year’s returns, Congress got rid of a number of items that, while smaller than heavy hitters like mortgage interest and property taxes, have added up in years past. This tax season is the last to allow for unreimbursed employee expenses like vehicle mileage, legal and accounting fees related to investments, job-search costs and others that helped generate a larger bottom line on Schedule A.