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Tax Simplification: The Devil is in the Details

By: Terry Roe
Published in Articles, Financial Planning & Budgeting, Tax Planning on February 15, 2018

Remember last fall when President Trump and Congress launched their efforts to overhaul the tax code? They told us we would soon be filing our taxes on a postcard and there would only be three tax brackets. Well, that isn’t what happened, so let me review with you some of the things that did happen.

Tax Rates

The lowest tax rate, 10%, remained unchanged. The remaining tax rates, 15%, 25%, 28%, 33%, 35% and 39.6% were replaced with 12%, 22%, 24%, 32%, 35% and 37%. These changes in the tax rates allow Congress and the President to proudly proclaim they have lowered taxes. However, the devil is in the details. Although the tax brackets were lowered for many taxpayers, the elimination or reduction of various deductions will increase the amount of income subject to tax. As a side note, I will be surprised if the State of Idaho will lower its tax rates so you can expect an increase in your state taxes.

Exemptions, Standard Deduction and Itemized Deductions

Prior to 2018 a personal exemption deduction was allowed for everyone. In 2017 that amount is $4,050. So, for example, a married couple with two children would claim a deduction against income of $16,200 (4 x $4,050). The tax law eliminates personal exemptions. However, the tax law has almost doubled the standard deduction. The standard deduction in 2017 is $6,350 for a single taxpayer and $12,700 for a married taxpayer filing jointly. In 2018 those amounts will be $12,000 and $24,000 respectively. So if you are married couple with no children your combined exemptions and standard deduction in 2017 total $20,800 and in 2018 total $24,000. You win, unless you are itemizing your deductions, then it depends on your individual circumstances.

The tax law made several changes to allowable itemized deductions. The change that seemed to get the most attention in the media and in congress was the limitation on the state and local taxes and property tax deduction.  In 2017 the deduction is not limited. In 2018, under the new law the maximum deduction for these taxes paid is $10,000.

A major change to the itemized deductions that has received very little attention is the elimination of the job expenses and miscellaneous deductions. Included in these deductions are unreimbursed employee business expenses such as job travel, union dues and job education and miscellaneous deductions such as tax preparation fees, investment advisory fees and expenses, and safe deposit box fee.

The mortgage interest deduction is now limited to acquisition indebtedness of $750,000 and the deduction for home equity indebtedness (HELOC) was repealed. There are also small changes made to the deduction for medical expense and charitable contributions.

Moving Expenses and Alimony

The deduction against gross income for moving expenses was eliminated. The deduction for alimony paid was repealed for any divorce or separation agreement executed after December 31, 2018.

Child and Family Tax Credits

The child tax credit for a child under age 17 increased from $1,000 to $2,000. In addition, a new tax credit for family members over age 16 of $500 was created. Under the old law the child tax credit began to phase out for taxpayers with adjusted gross income of $110,000 or more. Under the new law these credits begin to phase out at adjusted gross income of $400,000.

Miscellaneous

Traditional IRA conversions to a Roth IRA are still permitted, however, Roth recharacterizations, or the unwinding of a Roth conversion is eliminated.

The Alternative Minimum Tax exemption amounts are increased and the income level for exemption phase out is dramatically higher $500,000 for single and $1,000,000 for married filing jointly.

A new deduction equal to 20% of the domestic “qualified business income” from a pass through entity was created.

The new law doubles the basic estate exclusion amount from $5,000,000 to $10,000,000 (in 2011 dollars). However, this higher exemption is scheduled to go away December 31, 2025 so plan your death accordingly.

Disclaimer

President Trump and Congress told us they were going to overhaul the tax code so that you could file your tax return on a postcard. They said the new simplified tax code would put tax accountants out of business. It didn’t! Don’t rely on anything I have written here. The devil is in the details and your situation is unique. As long as we have taxes we will have complexity. We all have special interests or sacred cows that create this complexity and we elect representatives to watch out for our interests. Benjamin Franklin once wrote “but in this world nothing can be said to be certain, except death and taxes.” Because of the certainty of taxes and the certainty of complexity, I will certainly have a job until the day I die (if I want).

Terry L. Roe is a financial advisor with Onyx Financial Advisors, LLC an independent fee-only registered investment advisory firm located in Idaho Falls, Idaho.  He can be reached at (208)522-6400 or www.OnyxFinancial.com