Remember the play, “If it is Tuesday, it must be Belgium?”
The speculation over the likely provisions in the tax reform legislation feels that way.
Last week it was likely that tax brackets would change, it was likely that the standard deduction would increase…but it was likely that some itemized deductions would be eliminated or reduced. It was probable that child tax credit would be increased, and it was probable that the personal exemption and dependent deduction would be eliminated. It was most likely that there would be changes to the alternative minimum tax. It was uncertain if there would be changes to the treatment and calculation of cost basis. It was likely that the treatment of income for pass-through business would change. And then there was the rumor regarding deductible nature of tax-deferred retirement accounts.
On Wednesday of last week, it was announced that the Republicans in the House and the Senate had reached a tentative deal…in principle, with still some issues to work out. According to sources, the top income tax rate will be 37% reduced from 39.6%, and the top corporate rate will be slashed to 21% from 35%. The top tax rate currently applies to income above $470,000 for married couples, but the tax brackets will continue to be reworked until this bill is finalized. The standard deduction for married couples who do not itemize will nearly double to $24,000. However, personal exemptions have been eliminated.
State and local tax deduction, including real estate taxes, would remain, but would be capped at $10,000. Mortgage interest deductions would be available for mortgages up to $750,000. Deductions that would remain include medical expense, tax-free graduate school tuition waivers, private activity bonds, student loan interest deduction and the teacher spending deduction.
While it looks as if the legislation will be passed, it will then take weeks to wade through the final bill to see what it really says. There is not enough detailed information upon which to base tax strategies. Tax reform is very emotional and highly politicized. The impact on each individual depends on many, many factors and overreaction now is not likely to result in good decisions.
Potential actions before 12/31/2017: if you itemize deductions, and if your state income taxes plus real estate taxes are more than a total of $10,000, and if you are not subject to AMT (Alternative Minimum Tax), you may realize some tax savings by prepaying your real estate taxes now. This does not apply to state income taxes except if you owe an estimated state payment due January 15, 2018.
In addition, if your charitable donation is usually about the same from year to year, and you will be moving from itemizing deductions to the new standard deduction next year, then you may want to increase your donations this year.
If you are confused about this “tax simplification” bill and how it might affect you in 2018, don’t worry, we will have plenty of time to determine the details in time for filing next year.
If you have determined that you would benefit from prepaying your real estate taxes before December 31, 2017, we will be sending out a second email with instructions to follow as not all counties are set up to accept payments.