For those of you living over the top busy lives and only have time to read the headlines when it comes to the media coverage of the Trump 2018 Tax reform bill, you should consider hitting the pause button on your busy life and reading the following and clicking on the link at the end of this post for more detail in a very concise understandable form.
If many of you are like me and only have time to read the headline news, you might be thinking the 2018 tax code changes only benefit the “wealthy“. For argument sake let’s use the top 20% of households as being “Wealthy”. Seriously time to go below the headline and think again! If you don’t you may end up paying significant fines when you file your 2018 tax returns resulting from under withholding or not paying enough in quarterly estimated taxes. Not to mention the shock when your return is emailed to you, displays on the screen or prints and you’re paying double or triple what you paid last year.
Disclaimer: I’m no tax expert. Just an ordinary taxpayer who has read a bit below the headline and does his own tax returns!!
Yes, it’s certainly true that the corporate tax cuts set off two years of crazy equity appreciation in the stock market (some of which has been recently taken back). Yes, it’s true only the wealthy benefit from this equity appreciation. How positively this impacted your 2018 tax year is specific to your situation. I don’t attempt to cover this here.
Let’s just look at a couple of the most meaningful changes that will certainly affect many if not all of you:
Property tax deduction: Yikes!!
Previously, you could deduct the full amount of your property taxes paid for your primary residence and was vague on whether you could deduct property taxes on additional properties not considered rental properties. At least one additional property, and more, depending on how you interpreted the deduction description.
Now, Property tax deductions fall in the category of SALT (state and local taxes) and are limited to $10K in qualifying deductions. Any house in CA or any other high cost of living high tax state will likely be $1M plus in value and generate over $10K in property taxes alone. And this does even consider the sales taxes and other local use taxes you used to deduct with no limit. Take a quick look at your itemized deductions from last year and see what you deducted for this category, and I bet you’ll be shocked at the impact the difference between that number and $10K will be. For many of you fortunate enough to own property worth more than $1M, this will hit hard. Property taxes are going up and limits are coming down. Not that hard for this number to be $50K and above. If you deducted $50K in property taxes in 2017 you will pay $40K more in taxes for 2018. Again, this only considers the property tax component of SALT. It’s not exactly this simple but close enough for argument sake.
Personal exemptions, Gone!! Used to be able to deduct $4K for each exemption. Exemptions were for spouse and dependent kids. Married with 3 kids in the house was $16K in deductions. Bye bye!! (Note; previously this did start to phase out for AGI above ~$300K, thus you may not have seen the full benefit)
Miscellaneous deductions. If you pay a tax preparation service to do your taxes, Bye Bye! No longer deductible. Investment advisory fees. That incredibly annoying fee you pay your wealth manager every year whether your account does well or not, bye bye! No longer deductible. Moving expenses, gone! This can easily run into the $10’s of thousands in deductions gone.
I’m going to go out on a limb and assume those of you reading this are still alive, so I won’t cover the improved Estate (death) tax limit to $11M.
If you sold a home in 2018 there’s good news and bad news. Good news is your gains on the sale exempt from Federal taxes remained the same, but the bad news is you had to have lived there longer to qualify for the exemption. Went from 2 years to 5 years.
Tax brackets: For AGI (Adjusted Gross Income) of roughly $200K to $400K went from a rate of 33% to 35%. $400K to $500K went from 39.6% to 35%. Over $500K went from 39.6% to 37%. You figure where you fall. If you earned $300K you pay $6K more in taxes.
So, what should I do? You may be asking. Not a lot you can do other than make sure you’ve had enough withheld or have paid enough in estimated taxes so you don’t get hit with fines which can also add to $10’s of thousands depending on how much you underestimated the taxes you now owe.
See the following links for a really thorough and concise review: