Your New Tax Law: The Good, the Bad and the Beautiful


Are Your Taxes Going Down Or Up?

Let’s take a look at the highlights of the new tax law, and how it might affect you. If you would like a quick dollar estimate, try the Tax Plan Calculator at http://taxplancalculator.com/.

THE GOOD
More to Deduct: Like many taxpayers, most families will benefit from a rise in the standard deduction to $12,000 from $6,350 for single filers and to $24,000 from $12,700 for married couples. Many families will also see reductions in their marginal tax rate, or what they pay to the government if they earn another dollar.

This is huge: A married couple that has itemized deductions of $18,000 (real estate and sales taxes, mortgage interest and contributions – about average for our clients) would save $1,680 on lowered taxes.

Right into your Pocket: The tax bill doubles the child tax credit from $1,000 to $2,000 (up to three children under the age of 17) and expands the number of families eligible to claim it. That means if you have 3 kids at home under 17, you have just likely saved $3,000 on your taxes.

PLUS – if you are supporting anyone 17 or older (like your brother-in-law who lives on your couch), Uncle Sam will give you a $500 gift savings on your taxes.

WAIT, there’s more – Of the $2,000 credit, $1,400 is refundable—which means that if the amount of the credit is larger than the tax owed, the family will receive a refund for the difference (free money from your fellow taxpayers).

Under the legislation, the child tax credit begins to phase out for individuals with adjusted gross incomes above $200,000 and for couples above $400,000—up from $75,000 and $110,000, respectively, under current law. This means that working lower-class and middle class Americans will benefit most, not the “rich.”

Use 529 Plans for Primary or High School! The bill allows families to withdraw up to $10,000 a year from a 529 college-savings account to finance a child’s tuition at a private or religious primary or secondary school. (Under current law, these accounts—which offer tax-free growth—can be used only to pay expenses associated with college or other postsecondary education.)

The bill also allows parents of disabled children to roll over, or transfer, money from a 529 account in the child’s name to a 529 ABLE account, a savings vehicle for disabled people that offers the same tax-free growth available in 529 plans.

S Corps: Many of our clients own small businesses. Unlike most tax professionals, we have encouraged our clients to utilize this glitch in the tax code to save thousands of dollars a year in payroll taxes. The new tax law caps the top rate on the income earned by owners of “flow through” businesses — S corporations and partnerships — is reduced from 39.6% to a shade below 30%.

Estates: It is a travesty to have the government gobble up a lifetime of hard work by taxing someone’s estate when the die. All throughout one’s life, income taxes are paid on dollars earned and saved. What remains at the end is the taxpayer’s estate – their legacy. Imagine someone creating wealth and then having the government take 40% of it at death.

The new tax law allows the estate tax exemption is doubled, to $11 million for a single taxpayer and $22 million for married taxpayers. This means the vast majority of citizens don’t have to worry about leaving the government 40% of their assets at death.

All Tax Brackets are Lowered: There is some reduction in all of the tax brackets, which will benefit all of our clients.

Corporate Tax Rates are Slashed: The coming changes could prompt many business owners to consider switching to “C” corporation status. The tax overhaul would cut the top corporate tax rate to 21%, while the top statutory income-tax rate on service providers who don’t qualify for the pass-through break would be 37%. That is a big difference. But corporations are also subject to two layers of tax—one on income at the corporate level, and again when earnings are paid out as dividends. And – there is state income tax on these corporations in Florida.

And – the government is allowing overseas operations of US businesses to bring back money they have stashed over there (to save on the horrendous previous US business corporate rates) at a much reduced rate.

The main benefit to the average taxpayer is this allows corporations to keep more of their earnings. It allows corporations to expand, hire more people, innovate and create. It causes a huge desire to succeed without fear of paying ridiculous amounts of one’s earnings in taxes. The last time this happened with the Reagan Tax Cuts, the economy soared for 20 years.

Bye-Bye Individual ObamaCare Mandate: Although they didn’t get rid of ObamaCare, the politicians removed a huge piece of the cost to many of our clients. As you are aware (if you are not covered by a generous health insurance plan at your workplace), insurance premiums have skyrocketed in the last few years. Many of our clients saw increases of 200% or more, and increases in co-pays, making the insurance purchased through the Marketplace nothing more than ridiculously expensive catastrophic insurance. The difference to many families has been to increase out-of-pocket health care costs since 2012 by $20,000 a year or more. We thought this was supposed to go down by $2,500 per family…

In turn, many of our clients chose to give up health insurance altogether, paying the ObamaCare penalty which often stretched in many thousands of dollars.

Effective in 2019, this mandate goes away, and taxpayers will keep more of their hard-earned income.

What remains to be seen in what happens for 2017 and 2018. You will remember that President Trump dismissed the ObamaCare penalties for 2016 when he took office. We wonder if he will do the same thing for 2017 and 2018.

THE BAD

Itemized Deductions get Capped: Ruh-Roh. Your friends and relatives who live in highly taxed states, like California, New York, New Jersey, Iowa, etc. are getting socked. This doesn’t affect us here in Florida.

Previously, Floridians subsidized folks who lived in high tax states as their state income tax was a large deduction on their 1040 tax returns. Example: A California family has $100,000 in taxable income and pays @ $6,000 in state income tax. That’s 6k right out of their pocket that we don’t lose here in Florida. Up until now, you – and other taxpayers – subsidized this cost to the California family in the 25% tax bracket to the tune of $1,500 in savings on their 1040 Federal Tax Returns. For many taxpayers like them, this tax savings went away.

Now, all state, sales and real estate taxes will be capped at $10,000. It might affect some of our clients who live in homes where there are high real estate taxes, but the vast majority of our clients are unscathed.

They Give and Take Away: While the new tax law doubles the child tax credit and adds a large increase in the standard deduction, personal exemptions (a tax discount per capita in the household) goes away.

Alimony is More Expensive: No wonder so many young people today choose not to get married: divorce is painful and horrendously expensive. We have seen divorce cases where more goes to the attorneys than to the husband or wife.

Up until now, some of that expense was abated. Alimony has been a tax deduction for the party paying it; that just went away (does not affect divorce agreements currently in force at the time of the tax law passage).

THE BEAUTIFUL

It’s our opinion, anytime the government takes less of your money, it is a good thing. This will boost the economy as folks can now spend and save more.

Won’t it add to the deficit? Another falsehood promulgated by the fake news media. During Reagan’s term, tax revenues to the government skyrocketed as people stopped avoiding paying tax. Taxes, so to speak, became “on sale.”

Whereas people might get paid under the table, or get involved in schemes merely to save taxes, they changed their behavior and paid taxes instead as the cost went down. If there are increased deficits, it will be the cause of our politicians who are addicted to spending other people’s money (yours).

We will seek to keep our clients informed as more info comes out about the tax law that can affect them.

As always, thank you for being our client.

Jonni Marie Fonseca, Enrolled Agent & Allan S. Boress, CPA, CVA, FCPA

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