Continuing in our weekly installments of "What's New With....," Beth provides some clarity (and lots of great resources) to the new tax legislation. Enjoy!

------------------------

The Tax Cuts and Jobs Act, that’s what’s new.  Unless you have been living under a rock for the last several months, you have heard more than you probably cared to hear.  But here we go with some of the details.

• For most people, especially those that don’t itemize, the biggest change will be the disappearance of the personal exemption.  That was the roughly $4000 ($4150 in 2018) you got to deduct per/person in your household from your income before calculating the tax.  The tradeoff is that the standard deductions almost doubled, the tax credits (versus deductions) given for children has also doubled, and the level of income where these credits are phased out was increased quite a bit.  You need to do the math for your family to find out if you end up ahead or not.  

• A few sentences from NPR’s Marketwatch story sums things up:

Dividing all taxpayers into quintiles, the typical middle-class family -- what we’d call average -- will actually get about $930. The average tax cut for quintile below that is even less: about $360…..

It’s a huge windfall to the uber wealthy—like Trump himself, and deficits will rise sharply, meaning big government programs like the retirement programs you’re counting on could be cut…..

Sure, you’re getting a tax cut right now—great—but you may wind up giving it all back a few years down the road. For this reason, the true impact of the tax law, for better or worse, won’t be known for years.

• The Motley Fool does a good job of comparing 2018 under the old and new laws.  Pay careful attention to the section explaining tax breaks for parents.

• The New York Times does a good job of listing what is changing versus what isn’t changing.  

• On net, Marketwatch estimates that 143 million will pay lower taxes, and 8.5 million will pay higher taxes.

• USA Today published an article by the Motley Fool that calculates the new and old taxes for families under 5 different scenarios.

• Want to estimate the impact for yourself? H&R Block provides a free calculator for 2017 that is driven by your responses to questions.  When you reach the end, you are given your estimated tax liability for this year as well as an estimate of your 2018 taxes under the new law.  

• Newsweek takes a look at how the new tax law may inadvertently help boost the mobile/gig economy, as those with pass-through income (the self-employed, sole proprietors, LLCs, etc.) get to deduct the first 20% of their income.  

“Collateral Damage” -- or not?

Many people who itemize, especially those in high tax states, state tax revenues, the real estate market, and some institutions of higher learning.

• For high tax states, capping the deduction on state and local taxes (SALT), including property taxes, will hurt a high proportion of taxpayers.  One-third of taxpayers used this deduction with an average deduction of $12,500. (Even in Ohio, where most municipalities have a local income tax of 2-3% and property taxes are typically $4000/$100,000 of house value, it won’t take much for people to hit the $10,000 limit.) For those with incomes over $1 million, that deduction approached $300,000!!!  Some states are looking for ways to restructure their tax collection to benefit the taxpayer.  The Economist discusses this issue from several angles, and Bloomberg focuses on what New York Governor Cuomo is proposing.  

• The WSJ tackles how states might view the pluses and minuses of the New Tax Law on their potential tax revenue and growth.  In terms of tax revenue, most states base state income tax on Adjusted Gross Income (AGI) from your Federal tax return.  Figuring out how whether that will be a net positive or negative will take some heavy duty number crunching.  States will have to decide whether or not to adjust.  For many states, limiting deductions implies higher AGI and higher revenue, as states have not reduced their income tax rates.  Southern states, with generally lower state and local taxes, and anticipating higher growth as they become relatively more attractive places to live.

• In addition to the cap on deductions SALT taxes, limiting the deductibility of mortgage interest for mortgages over $750,000 may negatively impact the real estate market, especially in high tax/expensive areas. Housing prices will likely grow at a much slower rate, and people on the margin may decide to rent instead of buy.  A Money Magazine article breaks down the buy versus rent decision under several circumstances.  But the National Association of Realtors explains that because of their lobbying efforts throughout the legislative process, the changes could have been worse. This article includes what they expect will happen to the real estate market in coming years.

• A last minute addition to the Tax Reform legislation by Ted Cruz was the extension of 529 College Savings Plans, allowing them to be used to pay for private and parochial K-12 education.  A WSJ article explains why this will make the 529 plans more attractive, especially to affluent people, who are now limited on their SALT deductions. And on the flip side, an NPR piece discusses how states that give taxpayers a break on their 529 contributions are worried about the potential loss of income as these (affluent) people flow private school tuition through these plans to get the tax break. (Texas has no state income tax, so no problem there.)

• While the tax law surrounding student loan interest deductibility and Lifetime Learning credit remained intact, there will now be a 1.4% tax imposed on institutions of higher learning that have endowments over $500,000 per student and at least 500 students.  Check out the expected winner and losers from the WSJ.

Although it still isn’t clear exactly how the endowment tax will be calculated, the provision appears to create a system of winners and losers that could alter how schools grow, invest and spend.

Be Aware

• The beginning of tax season means a new season for identity thieves. Kay Bell reminds us on her Don’t Mess with Taxes blog about today’s ever present menace.  The post talks about both thieves targeting both professionals and individuals and offers suggestions on how to protect ourselves and what to do if you become a victim.

• Monday, January 29 is the first day you can file your taxes for 2017.

About the Author