For those who wish to file by April 17, the pressure begins to build around now. Before the race gets heated here shortly, you may want to learn how last year’s tax reform changed things.
You’ll be dealing with some of the biggest changes in a generation, so prepare. Besides fundamental restructuring like the elimination of exemptions, there are more changes. All the new rules will add much to the confusion, so best get a jump on it. Worse, many old and cherished tax tactics have gone by the wayside. If you’re not careful, the new tax “cuts” may wind up biting your wealth instead of reducing your taxes. Tax strategy, always important to wealth-maximizers, should be especially scrutinized this year.
Before jumping in, remember that US tax policy and law is in constant flux, driven by the political wind. The battlefield is ever-shifting, and readers should keep a sharp and frequent lookout. Like so many changes before it, the new tax reform is temporary, with many provisions “sunsetting” – expiring – after 2025, if they last that long. The future Congresses and President may extend them, or cancel them. Taxes may go up or down or stay the same. Tax policy breeds many unintended consequences, and change creates new winners and losers.
For now, we will mostly address income taxes. Since the urgency of these is probably why you are reading this article, please be attentive to our upcoming thoughts.
Here are some highlights of the big changes:
The estate tax exemption is $11,180,000 per individual – almost $22.4M per married couple – which should make for far fewer taxable estates. Remember that this may change at the whim of the next government. In any event, the exemptions revert to the old level in 2026.
Employee Business Expenses and Other Miscellaneous Deductions:
W2 employees – as opposed to independent contractors or business owners – have always had it difficult when it comes to business write-offs, where the small range of allowable deductions got whittled down to almost nothing by Schedule A. Well, the short stick’s now been whittled down to nothing, and employees no longer have any write off opportunities. Ditto for moving expenses, brokerage, IRA and investment advisory fees, new alimony, and most casualty losses. If these items apply to you, you could see significant tax increases. Where possible, using or setting up an owned business to expense applicable items could offer substantial relief.
Exemptions and Itemized Deductions:
The standard deduction is twice as much, changing the calculus of whether to itemize things like charitable contributions, home interest, and so on. Complicating this, there are no more personal exemptions. This is a sea change! Exemptions were basically a “bonus” deduction based on the size of the taxpayer’s eligible family. They were available regardless of whether you itemized other deductions or just took the standard deduction. Depending on your situation, this can dramatically blunt the value of the expanded standard deduction. The limits for charitable deductions are slightly different. The so-called SALT for State and Local Taxes deduction is curtailed, with the sum of income, real estate, and sales taxes capped at $10,000. Business owners can continue to deduct these items if they qualify as business use. Finally, the tax on deductions eliminated them or whittled them away for higher-income folks, effectively boosting their tax rate – is gone.
Capital Gains Tax Rates
stay the same at 0%, 15%, and 20%, plus (not to pick any NIITs), if applicable, the 3.8% Obama-era Net Investment Income Tax kicker. Remember that Capital Gains rates are determined by ordinary income rates. In other words, having sufficient business, interest, employment, or other “regular” income will drive the effective capital gains rate higher. Because capital gains income stacks on top of ordinary income, even just increasing ordinary income can effectively crowd out room for preferential long-term capital gains rates. In fact, the interrelationship between ordinary income and long-term capital gains creates a form of “capital gains bump zone” – where the marginal tax rate on ordinary income can end out being substantially higher than the household’s tax bracket alone, because additional income is both subject to ordinary tax brackets and drives up the taxation of long-term capital gains (or qualified dividends) in the process.
Call Williams & Kunkel CPA today in Flower Mound at 972-446-1040 to have a chat and find out how you can save money on your taxes as a real estate professional.