As I am sure many are aware, Congress is working on a bill to revise the tax code. The current public draft of the bill will reduce the deduction for state and local income and property taxes for 2018 and future years. Also, many will no longer receive a tax benefit from charitable contributions or medical expenses. The following is a quick overview of the bill as well as some potential tax saving tips for taxpayers.
What We Know:
The tax legislation bill, as it currently stands, will limit the total deduction of the following to $10,000 for the 2018 tax year. It is unclear if this limit will be increased yearly.
- State income taxes or state sales tax
- Personal property taxes paid on your personal residence
In the current public draft, the deduction for property taxes paid related to a rental property or property used in a trade or business will continue to be 100% deductible. Sales tax paid on purchases of items used in a rental or trade or business also continues to be 100% deductible.
The standard deduction is significantly increasing over where it was in 2017. Due to this, many taxpayers will no longer receive a tax benefit from charitable contributions, mortgage interest and state taxes among other items in 2018 and beyond as they will not itemize their deductions any longer.
What We Don’t Know:
We currently do not know when the proposed changes will take effect. The current expectation is that it will apply to the 2018 tax year, but could potentially be pushed off until 2019 or further.
We also don’t know if there will be any further changes to the tax rates or further adjustments to the allowable state and local income and property tax deductions.
What You Can Do Now:
Some taxpayer’s may be able to benefit from paying certain taxes in 2017 rather than waiting until the due date in 2018. For example:
- If you have owed with your state return in the past, you can pay the estimated amount that you will owe with your return before 12/31/2017 to ensure the deduction is preserved. You may use a voucher provide with your tax return or follow the instructions here: https://www.tax.ny.gov/pit/estimated_tax/filing_estimated_income_tax.htm. If you chose to wait until 2018 to pay the tax and the bill passes in its current form, you will not be able to deduct this payment.
- If you are in possession of a property tax bill that is not due until 2018, consider paying prior to 12/31/2017 to ensure the deduction is preserved. This applies to real property taxes on your personal residence, vacation home or non-rental/business property prior to year-end. Please note that there may not be an advantage for all to prepay taxes due to other current tax provisions.
- Many taxpayer’s could benefit from accelerating their charitable contributions into 2017 as they will be itemizing in 2017 but not in 2018 due to the increased standard deduction. Therefore you may want to consider making your planned 2018 charitable contributions in 2017. This would include cash, credit card and non-cash donations such as clothing or other household items.
- The current public draft allows medical expenses for 2018 at a threshold of 7.5% of adjusted gross income. That said, the increase in the standard deduction and the reduction in allowable state and local taxes will limit the usefulness to many taxpayers in 2018. In order to ensure the deduction is preserved, you may consider paying 2017 medical expenses by 12/31/17 either by cash or credit card.
Please Note: If your income and expenses are similar to last year AND you paid Alternative Minimum Tax (AMT) last year, prepaying tax and medical expenses likely will not be beneficial. You can determine if you paid AMT by looking at your 2016 tax return, Line 45 on page 2 of the Form 1040.
The Kane Firm will continue to monitor the progress of the proposed tax reform and notify you of any other important changes.