As 2017 draws to a close, we can reflect on a year full of surprises capped with the last-minute passing of the Tax Cuts and Jobs Act (hereinafter referred to as “tax bill”). In regard to the tax bill, listed below is what I have heard from taxpayers who itemize deductions, a recent IRS Advisory Notice and some other provisions. It is important to first note that the views herein are for informational purposes only and you should consult your tax professional and/or your local tax collector with any questions, including what and if you are eligible to prepay.
Since the passing of the tax bill, taxpayers have inquired about deferring income if they will be taxed at a lower rate in the future, or prepaying property taxes that are applicable in 2018 (particularly those taxpayers who reside in high property tax states).
For those taxpayers who itemize deductions, there have been some significant changes.
First, the deductibility of mortgage interest on mortgages greater than $750,000 has been eliminated on new mortgages. Although the deductibility of mortgage interest on preexisting mortgages over $750,000 is expected to remain, you should consult your tax professional prior to engaging in a mortgage refinance. Individuals who take out home equity loans can no longer deduct that interest under the new tax bill.
Second, the combined state and local income tax (“SALT”) deduction and property tax deduction has been capped at $10,000. This is a big limitation in high-income, blue states where home values are high and/or state and local income taxes are high.
Update: On Wednesday, December 27, 2017, the IRS announced, in an advisory notice on its website, that filers could claim their 2018 their real property tax payments on their 2017 federal taxes only if the taxes had been assessed and paid during 2017. See, for example, https://www.irs.gov/newsroom/irs-advisory-prepaid-real-property-taxes-may-be-deductible-in-2017-if-assessed-and-paid-in-2017. (A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017). If you are paying the real estate (or property) taxes through escrow with your mortgage lender, then you will also need to consult the mortgage lender on how to proceed. Again, prepaying property taxes isn't for everyone. Taxpayers who already pay the alternative minimum tax (AMT) and/or don't itemize deductions won't benefit, nor will taxpayers who expect a total of property and state income taxes to be $10,000 or less.
It is important to note that taxpayers cannot prepay their 2018 state income taxes this year and deduct them on their 2017 federal returns. But, if you are making quarterly estimated state income tax payments for 2017, you may want to consider making the fourth quarter payment by December 31, 2017 (in lieu of January 16, 2018). Cash basis tax payers can only deduct payments in the year that the payments were made.
Third, taxpayers can no longer deduct the cost of having their taxes prepared by a tax professional, the cost of tax preparation software, or the cost to file their forms electronically.
Some taxpayers have engaged in more aggressive tax-loss selling before the lower tax rates take effect in 2018. Tax losses are generally more valuable in a higher tax environment.
Alimony, for divorce and separation agreements signed after December 31, 2018, will no longer be deductible for the spouse making payments—it will be taxed at the payor’s rates. The payments will not be included in the recipient’s gross income.
The business deduction for entertainment expenses incurred is disallowed.
Please note that the above views/suggestions are general in nature and only relate to some provisions in the Tax Cuts and Jobs Act of 2017. Individual taxpayers should consult their professional tax and/or legal professionals for advice and guidance.
The information contained herein has been compiled from sources deemed reliable as of December 28, 2017, but is subject to legislative changes and is not intended to be tax and/or legal advice. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness are not guaranteed and all warranties, expressed or implied, are hereby excluded. Please consult your tax and/or legal professional for advice and guidance.
I wish you and yours a happy, healthy and prosperous new year ahead!