Like many people, we look hopefully at the New Year and all its potential. The changes in the tax code are still not out in full detail which is something the IRS has often done, but enough is out to safely say that one New Year’s resolution will need to be to change some old habits around both financial behavior and record keeping.
Structurally, many things remain the same. There are still seven tax brackets, and where you land in those brackets will dictate how much of your income you will owe the government. The numbers have changed from 10% to 12% and 15% to 22% but the standard deduction almost doubling for many will mean that although you might think, “I’m going from 10% to 12%, that’s more tax on me”, the end result might actually be less out of pocket. There are also increases in child tax credits, so families in the lower brackets are likely going to get additional help.
There is no tax planning to be done at that level. It will just have to play itself out and we will all settle into our new skin.
That being said, there are some huge changes which are going to mean that people will need to take action on many levels. The lower level items might be as simple as not taking time to keep certain records any longer. Miscellaneous deductions for instance on Schedule A are no longer deductible, so union dues, safe deposit box fees, work uniforms and yes even tax preparation fees themselves are no longer deductible. Less record keeping for you, and again not necessarily a loss for the taxpayer, as the amount that people were hoping that all these numbers added up to in order to get above the standard deduction won’t matter, as the new standard is 24,000 (for married filing jointly)!
But the bigger changes that are really going to matter are numerous. Everyone is talking about the state, local and property tax deduction limit, which will affect many people in more expensive areas. Home equity line loan interest is no longer deductible. Many Americans have been trained by the tax code to use a home equity line of credit instead of auto loans, or for second homes, instead of having a regular mortgage on that second home, since the interest was deductible, and the accounts are much more flexible than a standard mortgage. Many of those people are still above the new 24,000 standard deduction and need to rethink that borrowing behavior, as the risk for home equity loans is that most have a variable interest rate, and we are in a rising rate environment. The rate risk without the tax benefit may no longer be worth it!
Another potentially major change for some is the loss of the ability to recharacterize, or “unroll” a Roth IRA conversion. This change will not affect most taxpayers, but for those doing a strategic Roth conversion, the ability to unwind it later in the year was a safety valve against a mid-year income surprise. Now most Roth conversions are likely be done only in the last few weeks of each year in order to avoid this potential pitfall. The weeks between Thanksgiving and Christmas have typically been among the quietest times in a financial advisor’s office, but they are now likely to be among the busiest!
The changes for small business owners with pass-through income are very complicated! The new lower rate in the form of a deduction against pass-through income is tied to W-2 wages paid by the business, and many businesses pay little or no W-2 wage, so there may be some big disappointments awaiting many who thought that the new pass-through deductions would save them a lot in taxes. To actually measure the real benefit for most will mean careful planning and likely an increase in W-2 wages paid, with the resulting additional payroll taxes being weighed against the lower tax rate to get a small targeted additional benefit at best.
You know the old saying: Change is the only constant in life. So, we can complain, be blindly excited only to be unpleasantly surprised later, or shrug it off as “Whatever, I’ll find out how I fare in 2019, when I file my 2018 taxes”.
Those who like to keep as much of their money as possible, and not just hand over their hard-earned cash to the IRS, need to add some time at a tax planner’s office in early 2018 to their New Years resolution list. It may be complicated, but at least it will be easier than losing weight, so a “WIN” in the resolutions achieved column will feel great!