In the more than 40 years I have been a tax professional, this is the strangest year-end tax-planning scenario that I have seen.
This year is especially complicated because each house of Congress has passed legislation initiating radical changes. Unfortunately, the two versions of the bill are so different that we don’t know precisely which changes will be included in the final legislation. Furthermore, most of the changes will be effective on Jan. 1, 2018.
The House and Senate are expected to reconcile their measures just before Christmas. That leaves the holiday week for taxpayers and their tax advisers to attempt undertaking year-end planning steps.
Unfortunately, before year-end tax planning can be effectively implemented, we have to understand what Congress passed. That may take more than a week.
A few points can be made at this time.
First, since tax rates will be lower for most taxpayers in 2018, it probably makes sense to defer income into 2018 whenever possible.
Similarly, it may make sense to accelerate deductions — particularly those that will disappear in 2018.
That second point is really tricky because for many taxpayers, it is not certain which deductions will disappear.
Last week I gave a presentation at Cal State Northridge to about 40 tax professionals. In that presentation I analyzed the impact on a dozen or so taxpayers at different income levels. There are few general trends, and how each taxpayer fares is highly dependent on that taxpayer’s particular facts and circumstances.
Some people will see their taxes go up, while others – not that differently situated – will see their taxes go down. A few have different outcomes, depending on whether the House or Senate version of the bill is enacted.
My sources inside the Beltway tell me they expect the final legislation to look more like the Senate bill than the House bill due to political considerations.
Taxpayers are allowed to claim the greater of their itemized deductions or a standard deduction. Many itemized deductions are expected to be eliminated while the standard deduction doubles. Currently about 32 million taxpayers itemize. That number is expected to drop to 7 million next year.
The principal reason for this is the elimination/reduction of the deduction for state and local taxes.
Most people who itemize are homeowners. My analysis shows that many homeowners will no longer itemize, and consequently, will see no future benefit from the home mortgage interest deduction.
An average Santa Clarita Valley family of four who rent their home and make $90,000 will likely see their taxes decrease by $1,600-$1,700 per year for 2018 to 2023.
After 2023, when the child credit is reduced, those families will see a decrease of approximately $400 to $700 over what they paid in 2016.
If that same family owns a home, they face a much different situation. For 2018 to 2023, their taxes go down by only about $700 to $800.
When the child credit expires in 2023, their taxes will exceed their 2016 tax liability by $600 to $1,000, depending on whether the House or Senate version of the bill is enacted.
Generally, starting in 2018, renters and homeowners earning $90,000 will pay the same amount of tax.
If you currently claim the standard deduction, unless you are paying interest on student loans you probably don’t have to do much tax planning. If you are paying interest on those loans, you might want to consider pre-paying the January payment in December in case the interest deduction for student loans is repealed.
If you itemize, you really need to discuss your situation with your tax adviser. If your remaining itemized deductions for 2018 are less than the new standard deduction, you should consider making payments of state and local taxes, your January home mortgage payment and any other deductible expenses before Dec. 31. It also may make sense to accelerate charitable donations, including that year-end trip to Goodwill for all the stuff you want to get rid of.
If you are subject to the alternative minimum tax, the situation is more complex because you may get little or no benefit for pre-paying your state and local taxes.
One other consideration that few have contemplated is your California tax situation. California has a history of conforming to federal changes, so many of the itemized deductions that Congress will repeal are likely to be repealed by the California Legislature. (Of course, California is not likely to reduce its tax rates, so those who itemize can expect to see an increase in their California income taxes as well.)
If all of this sounds really confusing, be aware that even tax professionals are confused about the new rules. But this year, more than ever, do your homework and consult with a tax professional. For many, dealing with 2017 taxes is not for amateurs. It may be the last opportunity to undertake meaningful tax planning.
I am glad that I am retired and don’t have to advise clients.
Jim de Bree is a retired CPA who lives in Valencia.