Trump Tax Reform – tax breaks for everyone?

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:

  1. 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.
  2. 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.



Myths about the new tax bill

There has been a great deal of talk in the media and elsewhere about the new tax overhaul signed by President Trump in late December.  This has included a great deal of misinformation about what the bill actually contains.  Many experts tried to analyze what they thought the bill would contain prior to passage, and others were simply misinformed or mistaken.  Here are some of the common misconceptions I have either heard from clients or seen in the media.

  1. This bill increases taxes on the middle class – The vast majority of middle class taxpayers will get a tax break from this bill.  One good analysis I read showed that the average middle class taxpayer would see a decrease in tax of 8 – 10%.  In reviewing scenarios from my client base, this appears pretty accurate.  The bill has new lower tax rates for virtually everyone but it also eliminates some tax deductions.  It is possible for a middle class taxpayer to have an increased tax by losing more in deductions than they gain from the lower tax rates, but the vast majority of the middle class will pay less tax because of this bill.
  2. Your taxes will be so simple they can be filed on a post card – First off, most taxpayers efile their returns and don’t use any paper.  As for the claim that this bill simplifies taxes, well that depends.  Currently around 35% of taxpayers itemize deductions on Schedule A.  This bill nearly doubles the standard deduction and eliminates or limits other itemized deductions so many taxpayers who have itemized deductions in the past will not be itemizing under the new tax law.  So for those taxpayers there will be one less schedule to file with their taxes.  There are many other changes in this bill which will create new and complex tax planning opportunities, especially for business taxpayers.
  3. Mortgage interest is no longer deductible on my second home or on rental property – Both of those are false.  Elimination of the mortgage deduction was proposed for 2nd homes, but it didn’t make it into the final bill.  There was never any proposal to disallow mortgage interest for rental properties. (even though some of my clients called me on this one)
  4. Businesses will no longer be allowed to deduct any expenses for doing business.  Instead there will be a flat tax on gross receipts – This was never a part of the bill although I did hear this as a proposal before either bill passed the house or senate.  I heard a similar rumor regarding the disallowance of all expenses on rental property.
  5. Charitable contributions are no longer deductible – This is another false one but I heard it from multiple sources.  This bill does eliminate the deduction for certain miscellaneous itemized deductions though.  Under prior law these deductions were allowed if they exceeded 2% of your adjusted gross income.  This includes deductions such as employee business expenses, investment advisory fees, and tax preparation fees.

This bill makes numerous changes to our tax laws.  I will be blogging in the future about some of those changes that most affect my clients.  My advice would be to not rely on anything you hear in the media but contact a competent tax professional such as an Enrolled Agent to discuss any concerns you have regarding the new tax bill.