Six months in, impact of tax reform open to interpretation

“We may not get it this year,” says David Ayoub, CPA, a partner in Bowers & Company CPAs, PLLC.

With no regulations providing guidance as to how to apply the tax changes passed by Congress and signed by President Trump at the end of 2017, accountants are going to be left to interpret the law themselves, Ayoub says. “It’s not the worst thing in the world.”

For most in Central New York, the biggest impacts of the new tax law will be the reduction in rates of taxation, the limit on how much in state and local taxes can be deducted from federal taxes, and the loss of what had been a $4,150 personal exemption, Ayoub says.

In a high-tax state, such as New York — where the average property tax bill on a home was more than $7,000 last year, and where the state income tax top rate exceeds that of all but six other states — that will reduce allowable deductions for many filers. 

Thomas Kamide, CPA, partner at The Bonadio Group in Syracuse, has run comparisons for his clients and has found that most who don’t work for themselves will end up paying more — largely because of the reduction in how much in state and local taxes can be deducted and the loss of the individual exemption.

But both CPAs caution that every case is different. For some, the increase in the federal tax credits for children will more than offset smaller state and local tax deduction. For others, the cut in tax rates will save so much that some will come out far ahead.

Sharing a chart of new rates for married couples filing jointly, Ayoub notes that for households with incomes between $156,150 to $165,000, tax rates will drop from 28 percent to 22 percent. That 6 percent reduction on $165,000 is almost $10,000.

The tax-rate drops from 33 percent to 24 percent for those with incomes between $237,951 and $315,000 — a 9 percent cut. That’s worth more than $28,000 for someone at the top of the range.

While there are many variables to be weighed, Ayoub offers a simple formula that may work for many: “If you have less than $24,000 in deductions, you should take the standard deduction.”

The standard deduction jumped for tax payers of all classes. For singles it went from $6,350 to $12,000; for married filing jointly, it went from $12,700 to $24,000; for married filing separately, it went from $6,350 to $12,000; and for heads of household it rose from $9,350 to $18,000.

The near doubling of standard deductions is expected to cause many filers to forgo itemizing on their federal returns. The loss of some deductions may contribute to that, Kamide says. For instance, he says, salespeople who claimed unreimbursed business expenses won’t be able to do so under the new rules. “That’s gone,” he says.

Is there anything to be done about the new limits on state and local tax deductibility? Federal regulators appeared to shut the door on discussed workarounds that would made on taxes above the $10,000 limit charitable donations or payments to entities that could be used as credits toward their tax bill.

No go, the IRS said in a May 23 release, “federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.”

However, Ayoub says those with second homes, camps, beach houses, or other properties might consider turning them into rental properties. Tenants would help pay the property taxes and a portion of taxes could be deductible as a business expense. “You get it off your itemized deductions.”

Or, he says, a camp or other property could be put into trust or a partnership of family members or even given over to family member who can make use of the property tax deduction. 

Those are decisions that go beyond tax concerns, he says. However, “you can’t get the best tax benefits without giving up some control.”

A 400-page document when introduced in the House of Representatives, the Tax Cut and Jobs Act of 2017, affects many other aspects of taxpaying, including raising the exemption phaseout for the Alternative Minimum Tax, doubling the tax credit for children (and raising the phaseout for that credit from $110,000 in income to $400,000) as well as limiting the deductibility of home equity loans.

While Kamide’s analysis finds most of his clients will pay more under the new rules, Ayoub says he thinks individuals who don’t own their own businesses but do own their own homes will see a benefit, “however slight.”

Then he adds, “those at the upper end are also making out fairly well.”   

“We may not get it this year,” says David Ayoub, CPA, a partner in Bowers & Company CPAs, PLLC.

With no regulations providing guidance as to how to apply the tax changes passed by Congress and signed by President Trump at the end of 2017, accountants are going to be left to interpret the law themselves, Ayoub says. “It’s not the worst thing in the world.”

For most in Central New York, the biggest impacts of the new tax law will be the reduction in rates of taxation, the limit on how much in state and local taxes can be deducted from federal taxes, and the loss of what had been a $4,150 personal exemption, Ayoub says.

In a high-tax state, such as New York — where the average property tax bill on a home was more than $7,000 last year, and where the state income tax top rate exceeds that of all but six other states — that will reduce allowable deductions for many filers. 

Thomas Kamide, CPA, partner at The Bonadio Group in Syracuse, has run comparisons for his clients and has found that most who don’t work for themselves will end up paying more — largely because of the reduction in how much in state and local taxes can be deducted and the loss of the individual exemption.

But both CPAs caution that every case is different. For some, the increase in the federal tax credits for children will more than offset smaller state and local tax deduction. For others, the cut in tax rates will save so much that some will come out far ahead.

Sharing a chart of new rates for married couples filing jointly, Ayoub notes that for households with incomes between $156,150 to $165,000, tax rates will drop from 28 percent to 22 percent. That 6 percent reduction on $165,000 is almost $10,000.

The tax-rate drops from 33 percent to 24 percent for those with incomes between $237,951 and $315,000 — a 9 percent cut. That’s worth more than $28,000 for someone at the top of the range.

While there are many variables to be weighed, Ayoub offers a simple formula that may work for many: “If you have less than $24,000 in deductions, you should take the standard deduction.”

The standard deduction jumped for tax payers of all classes. For singles it went from $6,350 to $12,000; for married filing jointly, it went from $12,700 to $24,000; for married filing separately, it went from $6,350 to $12,000; and for heads of household it rose from $9,350 to $18,000.

The near doubling of standard deductions is expected to cause many filers to forgo itemizing on their federal returns. The loss of some deductions may contribute to that, Kamide says. For instance, he says, salespeople who claimed unreimbursed business expenses won’t be able to do so under the new rules. “That’s gone,” he says.

Is there anything to be done about the new limits on state and local tax deductibility? Federal regulators appeared to shut the door on discussed workarounds that would made on taxes above the $10,000 limit charitable donations or payments to entities that could be used as credits toward their tax bill.

No go, the IRS said in a May 23 release, “federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law.”

However, Ayoub says those with second homes, camps, beach houses, or other properties might consider turning them into rental properties. Tenants would help pay the property taxes and a portion of taxes could be deductible as a business expense. “You get it off your itemized deductions.”

Or, he says, a camp or other property could be put into trust or a partnership of family members or even given over to family member who can make use of the property tax deduction. 

Those are decisions that go beyond tax concerns, he says. However, “you can’t get the best tax benefits without giving up some control.”

A 400-page document when introduced in the House of Representatives, the Tax Cut and Jobs Act of 2017, affects many other aspects of taxpaying, including raising the exemption phaseout for the Alternative Minimum Tax, doubling the tax credit for children (and raising the phaseout for that credit from $110,000 in income to $400,000) as well as limiting the deductibility of home equity loans.

While Kamide’s analysis finds most of his clients will pay more under the new rules, Ayoub says he thinks individuals who don’t own their own businesses but do own their own homes will see a benefit, “however slight.”

Then he adds, “those at the upper end are also making out fairly well.”