The changes to tax law that are currently making their way through the House and Senate have been all over the news lately, but there is still a lot of confusion over what exactly is being proposed and how it might impact the average American taxpayer. Frankly, keeping track of the news about all the different proposals and their potential repercussions has reminded me of that EDS Super Bowl ad about herding cats!
The debate in Congress is still ongoing so there’s more to iron out, but here are some of the current proposals, as well as a few tax strategies that could benefit you – depending on your financial situation – for your 2017 taxes.
(Also, I want to clearly state that I am not a tax attorney or accountant. The goal is to make you aware of the changes and possible actions you might want to consider taking, but it should not be considered as professional tax advice. For that, you should consult your tax advisor.)
Future tax returns may include simplified filing for some
Many taxpayers who currently itemize deductions may find it more beneficial to switch to just claiming the standard deduction on their 2018 return, assuming that the currently proposed increases to the standard deductions are part of the final bill.
New standard deductions
The current bill proposes upping standard deductions to nearly double their current levels. The new standard deduction would be $12,000 for single taxpayers and $24,000 for married couples filing a joint return.
Fewer people will itemize
Assuming that the law passes with the currently proposed deduction levels, itemized deductions may no longer add up to more than the standard deduction. That means that some taxpayers who currently itemize will have no reason to file a return with itemized deductions after this tax year. This is more likely to be the case if you live somewhere with high property taxes or high state and local taxes (SALT). That’s because the proposed tax reforms would only allow you to deduct one of those types of taxes and would limit the deduction to $10,000. With these limitations, the new standard deduction may be more than your itemized deductions.
In fact, that’s my personal situation if the tax reform passes as proposed. My itemized deductions have exceeded the standard deduction threshold every year since I bought my home. But the combination of a new, higher standard deduction and being able to itemize only my state income tax or my property tax would mean that the standard deduction will be larger than my total itemized deductions. So starting with the 2018 tax year, I will probably just file a 1040EZ tax return like I did in the days before I was a homeowner. The good news for me is that filing my taxes will be quick and easy. The bad news is that I will no longer be able to claim deductions for my state income taxes or charitable contributions.
Should you consider prepaying deductible expenses now?
If you’re in the same boat as me and the larger standard deduction means you probably won’t itemize deductions starting with your 2018 tax return, there are a couple of actions you may want to consider taking right now.
Whether these actions will benefit you depends on a lot of factors. For example, if you have a high income, taking extra deductions this year could cause you to fall under the Alternative Minimum Tax (AMT), negating any tax savings you’d realize absent the AMT, so you definitely need to crunch the numbers and talk to your tax advisor before you decide on any course of action.
Mortgage interest prepayments
Because the mortgage payment you normally make in January is for your December mortgage “bill,” paying your January 2018 payment in 2017 means you can deduct it on your 2017 tax return. But keep this in mind: Claiming 13 months of payments on your 2017 taxes means that if you do ultimately itemize in 2018, you’ll only have 11 months of payments to itemize then (unless you prepay your January 2019 payment in December of next year).
Property tax prepayments
Property taxes are deductible in the year they are paid, so if your locality lets you prepay – some do and some don’t – you may be able to deduct those prepaid taxes on your 2017 tax return. However, with this one, there are a couple of huge caveats. If you pay your taxes into an escrow account, you can only deduct the actual amount paid in taxes, which can differ from the amount you pay into escrow. Also, state and local taxes are not deductible under the AMT, so if you fall under the AMT in 2017, there is no benefit in prepaying your property taxes.
Pro tip: The current tax reform proposal limits the property/state/local tax deduction to $10,000, so if your property taxes are higher than that threshold and you continue to itemize your deductions, you could prepay part of your property taxes now to optimize your deductions. For example, if your property taxes are $15,000 a year, you could prepay $5,000 this year and pay the remaining $10,000 next year. But again, the caveats about the AMT and the intricacies of your unique situation apply, so consult your tax advisor before prepaying.
If you normally donate $2,000 to your church or $500 to the American Cancer Society annually, you may want to consider donating extra this year so you can claim a higher deduction on your 2017 tax return. By effectively “prepaying” part or all of your 2018 contribution in December of this year, you’ll be able to increase your 2017 deductions without affecting those for 2018 (because your 2018 1040EZ won’t have itemized deductions, including those for charitable donations).
Keep in mind before you pull the trigger on this action that if the tax reform proposal changes in ways that make it better for you to continue to itemize in 2018, you’ll have effectively reduced your 2018 itemized deductions by prepaying your charitable contribution. Basically, taking this action is likely to be beneficial tax-wise only if you’re switching from itemized deductions (charitable contributions are deducted) to a standard deduction (no charitable contribution deduction) starting with your 2018 return.
Other tax changes
As of the publication of this article on December 15, 2017, the list below represents a summary of the proposed changes we think will impact a lot of our members. If you want to take a more detailed look at what is proposed, check out the House and Senate Conference Committee Policy Highlights, which summarizes the current proposed bill. Just keep in mind that the entire tax reform package could get voted down altogether or further negotiations may change it significantly from its current state.
Mortgage interest deduction. Currently, homeowners can deduct the interest paid on mortgages up to $1,000,000. The new proposal will cut the mortgage threshold to $750,000 for new mortgages, but if you already have a mortgage on your home, you’ll be grandfathered in at the current million-dollar level.
Children. The Child Tax Credit will go up to $2,000 with refundability of 70% ($1,400), and the income phaseout threshold will be increased to $400,000. Also, you’ll be required to have a Social Security number for any child for whom you claim the credit, so if you don’t have an SSN for all your kids, you should get one.
Educational savings. The amount of your 529 account that can be distributed each year would bump up to $10,000 and these funds would be eligible for rollover into ABLE accounts for disabled dependents. Additionally, some home-schooling expenses will become 529-eligible.
Alimony. Alimony will no longer be a deductible expense for the ex-spouse paying it, and will no longer be taxable income for the ex-spouse receiving it. This proposed change will only be effective for divorces or separations that happen beginning in 2019.
Sports booster donations. If you make a big donation to your college in order to have rights for season tickets or preferred seating for games, you’ll only be able to claim a charitable deduction for 80% of the amount you donate.
Work-related moves. Currently, if you have to relocate for a job and you pay the moving expenses yourself, you can likely deduct them. The new law ends that deduction for everyone except military families. If your company pays for your relocation, the amount of that employee benefit will count as taxable income for you.
Estate taxes. Both the House and Senate want to double the amount of an estate that is not taxable under the estate tax.
The final vote on the tax reform proposals has happened. If any of the above changes might affect your tax situation, you should pay close attention to what the tax reform looks like so you can make smart-money decisions about any action. Please consult your tax adviser if you have questions on the pending tax reform.
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