As I have written about before, although the recent tax reform bill lowers tax rates for virtually everyone, not everyone will have their overall federal income tax reduced. That’s because the law includes some tax breaks but also eliminates some deductions. In doing an analysis of my client base, the vast majority of clients will have a lower tax bill. But, roughly 12% of my clients would pay more if you apply the 2018 law to their 2017 tax information.
In my client base, the largest reason for a tax increase under the new law was the elimination of the deduction for employee business expenses. Under prior law, expenses such as union dues, supplies, continuing education and mileage expense for a temporary job could be deducted if they exceeded 2% of income. Certain conditions had to be met to deduct the expenses and this has been a target area for IRS audits in recent years because of people claiming improper deductions.
Let’s go through a couple of examples:
- Ima and Ura Builder had a combined income of a little more than 72,000. They have 3 children all young enough to qualify for the child credit. In 2017, they had total itemized deductions of roughly 29,000 which included 9,500 of deductible EBE. (employee business expense) If you apply 2018 law to their 2017 situation, they lose the 9,500 EBE but get an additional tax benefit from the expanded child tax credit and the overall tax rate reduction. Their net result would come out with owing an additional $3 in income tax.
- Olive Operator runs heavy equipment on a construction site and earned 115,000 in wages plus some other investment income giving her a total income around 117,000. She worked for roughly 10 months outside her tax home so her EBE including travel costs, union dues, etc was just over 14,000 and total itemized deductions were roughly 19,000. She has no children or other dependents. Applying the 2018 law to her case would result in the loss of EBE, but a lower overall tax rate. She would end up with 1,950 in additional federal tax liability.
Most of my clients who were eligible to deduct EBE will still have lower taxes in 2018 but especially those with large amounts of EBE may not. My next blog post will most likely be about the other reason Californian’s don’t like the Trump tax act which is the limitation on the SALT deduction. We would be happy to answer your questions on how the various provisions of the tax reform bill will impact your individual circumstances.