Dear Friends, Clients and Colleagues:
In recent days many of you have been contacting us regarding the recent Tax Act. We are happy to continue to answer your individual and specific questions; however I thought it good to also provide a high level summary of the more important items. Note these changes do not go into effect until January 1, 2018 (and in some cases later) and so your 2017 returns will be very similar to 2016.
State and Local Income Tax Deduction (SALT)
This is probably the biggest change particularly for those of us in high tax states like California. The deduction for state and local taxes will now be capped at $10,000. This includes property tax as well. So your total deduction for state taxes and property taxes cannot exceed $10,000. For those who are generally not subject to the AMT (alternative minimum tax) this is a significant and unpleasant change. For those generally subject to the AMT the impact is less profound as these taxes are an “add back” for AMT purposes anyway.
Note for Owners of Rental Properties: Many of you have asked if the deduction for property tax on rental properties is similarly limited to $10,000. It is not. Property taxes will continue to be fully deductible as a rental property expense.
Action Item: Consider prepaying the 2nd installment of your property tax by December 31 as well as making an estimated payment for any CA tax that may be due. This is particularly important if you are not subject to the AMT. By paying before year end they will be deductible on your 2017 return but if you wait until 2018 they will not be deductible on your 2018 return (except up to $10,000).
Miscellaneous Itemized Deductions (investment expenses, unreimbursed employee expenses, etc.)
These will be going away so consider prepaying any by December 31, 2017
For some of you this is significant. Particularly for those of you with significant unreimbursed employee expenses including the home office expense. You may wish to consider whether you can restructure your activity as a business activity (e.g. self-employed) to be able to continue to deduct. For those of you for whom this makes sense this could include discuss with your employer about switching to “contractor” status. Please note this is a major decision with additional considerations and best to discuss with us before making any decisions.
Note: For those of you who are self employed (file schedule C) all expenses, including home office, continue to be deductible. This affect only W2 employees.
The new mortgage interest limitation will drop from $1M to $750,000 which means only the interest on the first $750,000 of debt will be deductible.
Note: This affects new loans only. Existing mortgages will be grandfathered in and you may still deduct the interest associated with the first $1M of debt.
These rates and taxes will remain unchanged and are still subject to the Net Investment Income Tax as well.
This is by far one of the more complex areas of the new bill. There is a new 20% deduction at the individual level for pass through income. This basically means that you pay tax on only 80% of your net income. However there are limits and qualifications. Many types of businesses will not qualify for this deduction. This is best discussed on a case by case situation.
Estate and Gift
The exclusion for estate and gift tax will nearly double to $10M for individuals and $20M for couples. However, note that this is scheduled to “sunset” and revert back to existing law in 2025.
The Kiddie tax regime has been modified by essentially taxing the earned income of a child at the rate for single individuals and the unearned income at the estate and trust rate.
For divorce or separation agreements entered into after December 31, 2018 or entered into before that but modified after the payor will no longer receive a deduction and the recipient will no longer be required to report as income.