2017 Pre-Payment Deductions (limited time only)

Due to tax law changes anticipated to go into effect for tax year 2018, many individual tax deductions, credits and exemptions that will benefit you during the upcoming tax season (TY2017), will provide little or no benefit for tax year 2018 and after.

However, some deductible expenses that you would typically remit during 2018 can be prepaid on or before 12/31/17; these pre-paid items can be deducted on your 2017 tax return (upcoming tax season). For many of you, prepaying will generate a significant additional tax break that you will lose if you delay payment.

Note that only select pre-payments of 2018 expenses are eligible to be claimed on your 2017 tax return; common deductible pre-payments include:

  1. 2018 property tax (primary residence and second home). Does not apply for rental properties.
  2. Mortgage interest (not principal payments) on your home mortgage. Does not apply for rental properties.
  3. State and Local Income Tax (this one can be tricky to ensure a proper tax benefit).
  4. Maximize your charitable contributions (cash and non-cash) in 2017. For clients with non-cash contributions totaling more than $500, special reporting will be necessary.
  5. PMI
  6. Medical Expenses & Out-of-Pocket Premiums, including Medicare (note that medical deductions typically provide a tax benefit only when total medical costs are relatively high – i.e. at least 11% (for those under 65) and 8% (for those 65 and older) of your adjusted gross income (Line 37 of form 1040).
  7. Moving Expenses (if you are planning a move in 2018, prepaying in 2017 could significantly reduce your taxes). Logistically speaking, pre-paying moving expenses could be challenging, and risky.
  8. Conversions of Roth IRA’s to Traditional IRA’s. Conversions are an old trick to reach into a lower tax bracket and tax payment. For some, a conversion can be more beneficial, both long and short-term, than continuing to hold a Roth. The conversion option will likely be eliminated beginning 1/1/18.
  9. Note that the individual healthcare mandate is expected to no longer be in effect for tax year 2018; therefore, clients without healthcare insurance coverage for themselves and family members at any time during 2018 will not be penalized on their 2018 tax return. Although, for the upcoming tax season (TY2017), you may still be penalized for not having healthcare coverage, we anticipate that the Trump administration could retroactively waive 2017 coverage failure penalties.
  10. Additional prepayments not listed here may qualify as deductible on your 2017 tax return. Give us a call to discuss.

Small Business Clients:

Beginning 1/1/18, many tax changes will go into effect for small businesses; however, to-date (12/18/17), important FINAL details have not been published by the US House Ways and Means Committee or by the US Senate. Once these changes are released to the public, Doorstep Mobile will contact our clients via e-mail and blog updates.

Give us a call, email or text if you have further questions. In the meantime, for many of you (but not all), it would be advisable to pre-pay as much of the above-referenced expenses as you are able. Best practice would be to contact your county tax commissioner and mortgage lender to ensure that any pre-payments of property tax, PMI and mortgage interest are reported properly on your 2017 mortgage statement. To be eligible as a deduction on your upcoming 2017 tax return, pre-payments much be recorded on your 2017 mortgage statement and other relevant tax documents.

SALT Tax Deduction Scam

The following deductions: State and Local Tax (SALT), mortgage interest, property tax, PMI and charitable contributions are combined as a single itemized deduction. Your itemized deduction can include other items, but those referenced above make up approximately 99% of itemized deductions claimed by most taxpayers under existing tax law. Increasing the standard deduction to $24,000 under the new tax law means that virtually all middle and upper-middle class married couples will claim the standard deduction and will no longer elect to itemize (everyone has the option to take the standard deduction or to itemize – obviously most taxpayers will elect to claim the larger of the two deductions). Most taxpayer’s itemized deductions typically fall far short of $24,000.

However, under the new law, allowing the SALT deduction and all other itemized deductions to remain on the books WILL benefit those with excessively high value homes and higher salaries (i.e. the wealthy). SALT is a deduction for state income tax paid (i.e. withholding from your W-2, or voluntary quarterly tax payments by small businesses owners and 1099 contractors). With the exception of home owners living in states that do not assess income tax, wealthy persons pay more SALT tax, property taxes and mortgage interest than the rest of us; therefore, if SALT and all other itemized deductions (mortgage, interest, PMI, charitables) continue as part of the itemized deduction computation, only wealthy taxpayers will be able to claim a deduction greater than the new $24,000 standard deduction.

So, it is no wonder why Mitch McConnell and his Republican henchmen are now, at the 11th hour of tax reform , pushing through the SALT deduction to be included as part of the new tax law; he, his friends and his family will be the beneficiaries! Although there are expectations that there will be a $10,000 cap on the property tax portion of itemized deductions, very few home owners in the US pay more than $10K in property tax (with the exception of expensive homes in large metro areas such as NYC, LA, SF, etc). Even with a $10,000 cap on the property tax deduction, as proposed in the upcoming new tax law, a wealthy household’s combined itemized deduction will continue to exceed the $24,000 standard deduction.

Of course, the wealthy pay AMT ( an additional tax on higher incomes), and part of the EXISTING AMT tax calculation is to disallow some itemized deductions; therefore, we should all keep a close eye on how the NEW AMT will be calculated. Although I despise cliche’s, the devil of tax law truly is in the details; if the new AMT is watered down (as is expected), wealthy taxpayers would continue to benefit from itemized deductions, providing them with a deduction in excess of the $24,000 deduction limit that will, by default, be imposed on the rest of us.

Wow, and most Americans supporting the Republican party do so for what reason? Because either they are ill-informed; are type-A boneheads, or… they are wealthy. Unfortunately, most Republicans are not wealthy, but they do gobble up the BS being shoveled to them on Fox news and the like. They like supporting powerful and boisterous men and women, they enjoy hearing how the Dems use our tax dollars in excess to help the poor (which, I agree, is true of our broken welfare system which encourages laziness and apathy, providing fish but no instruction on how to become a good fisherman).

But being pro-business and supporting clamp-downs on the welfare system is not why most Republicans choose their party; supporting the Republican party makes party advocates feel as if they are a part of some elite club – the big boys, big boys and girls with booming voices; type-A’s. Being on the side of the so-called “tough guys” makes your average Republican feel safe, supported, riding on strong shoulders. Meanwhile, the big boys are laughing at these supporters and pissing on all of our lawns!

Trump is in ALL of our faces, letting us know full well that the billionaire boys club members are the only truly important people on this planet. Every day he and his family promote their twisted “Heart of Darkness” Camelot outreach program. Yes, we’ve always known that our government is corrupt, at least those of us with half a brain, but now McConnell is in our faces with his latest comment: when asked why the tax reform is not more balanced in favor of the middle class McConnell stated, with a snicker and his trademark wry smile, that giving more tax breaks to the middle class, and I quote, “would be impossible”. Hmm, and the middle class Republican supporters are not taken aback by such a statement (and so many others that clearly say, “FU American worker”)? How is it possible that most Republican supporters cannot understand what is at the top of the Republican Senate’s wish list? In short the Republicans are on a slow but steady trek to turn our country into a Wealthy vs  Poor state, similar to Mexico (and if you didn’t know, Mexico is not a poor country, but all of its wealth is concentrated, much more so than in the US; that is why so many Mexicans cross the boarder). If things continue as they are, one day, many of us may be attempting to cross the border into Canada, but by that time, the Canadian boarders will likely be closed.

To be fair, there is no way that our Democratic leaders are much better than the Republican leadership; Democratic leadership is almost as equally bought-and-paid-for, but the Dems are better by a slim margin. Under Trump, and the Republican tour-de-force, that slim margin is growing exponentially. Unfortunately, trading the Trump era Republicans for the Dems is kind of like trading an incurable brain tumor for a slow moving, more “manageable” form of cancer. At least you have a chance with some cancers; but with brain tumors, eh, not much of a chance at all.

2018 Tax Changes Explained (Tax Rates & AMT)

Under the Senate’s proposed new tax law, which is expected to go into effect for all taxable income (line 43 of current tax returns), that you earn Jan 1, 2018 and after, most married taxpayers with a combined TAXABLE income between $45,000 and $250,000 would receive an approximate 13% – 15% reduction in income tax vs. tax that would have been due under the old laws (see Table 1 below).

For households with taxable income less than approximately $75,000, the savings will be readily apparent, especially for those without mortgages or state income tax, and all others who typically do not itemize tax deductions. However, households with taxable income over approximately $75,000 will continue to be subject to an additional tax: AMT (alternative minimum tax), which will significantly reduce income tax savings outlined in Table 1 below. Note that income tax and AMT are separate taxes, calculated differently and separately, on earned and unearned income.

Due to its complexity and uncertainty of how AMT will be calculated under the new tax laws, AMT, although expected to significantly increase taxes on taxable income over $75,000, is not figured into the amounts listed in Table 1.

AMT is an additional tax which is added to income tax when income exceeds a threshold level. As well, when calculating AMT, itemized deductions are often disregarded or significantly reduced. The proposed new tax laws have not raised the AMT threshold very much, therefore AMT will likely continue to over-tax upper middle class households; although taxable income at or above $75,000 is subject to AMT, the proposed AMT threshold is expected to remain heavily skewed against household incomes between approximately $190,000 – $480,000.

Although the dirty details of the new AMT have not been revealed, based on what information has been released to-date (recently leaked), the new AMT will continue to disproportionately over-tax high-level professionals with earnings in this range. Professionals such as engineers and scientists, computer programmers and accountants (with the exception of Wall Street, insurance company and banking slugs), who earn salaries between $190,000 and $480,000 are the unrecognized backbone of the US economy; however, the tax system (both new and old) treats these well-educated, hard working men and women, who are integral to wealth-generation for all of us, as nothing more than tax-load-bearing pack mules.

The proposed new tax laws will increase the child tax credit from $1,000 to $2,000, but will eliminate the $4,000+ dependent deduction. A deduction of $4,000, for most taxpayers, is the same as a credit of $1,000; therefore, for households with approximately $75,000 of taxable income or less who in the past were eligible to claim the credit, nothing changes – it is a “wash” so to speak. However, if under the new laws income thresholds for child tax credits remain relatively unchanged, households with taxable income above approximately $75K will lose out big time.

Why? Because you will lose the tax credit AND the dependency deduction. In the past, due to your income being too high, you may not have received a child tax credit or your credit may have been insignificant; however, under the old law higher income did not not limit your ability to claim a child or relative dependency deduction. Under the new law, there are only credits (no dependent deduction) and if credits remain income dependent, bang, gotcha! You will pay approximately $1,000 more in tax for each child or other dependent that you claimed in prior years. Now there is not only a marriage penalty, but a child penalty (if your income is high enough, which includes most educated technical workers and professionals).

So, what about married households with children and taxable income under $75,000? Unless there is something in the final tax bill for which we are currently unaware (which I would not doubt), married households with $45,000 to $75,000 of taxable income will hit the tax savings trifecta! You will get the full $2,000/child tax credit (or a high % of the full credit) and you will benefit from the new, very high, $24,000 standard deduction. When a couple’s combined mortgage interest, property taxes, PMI and state income tax have not been high enough in prior years to itemize (i.e. you typically claim a standard deduction), that couple would have taken the much lower standard deduction. Under the new law renting is not a tax negative, so rent on!

Many households with income between $45,000 and $100,000 who typically DO itemize are expected to enjoy a tax decrease; however, the decrease will not be as significant as those with similar incomes who did not itemize in the past. Bottom line: owning a middle to upper-middle class home will very likely have $0 positive impact on your income tax for income earned 1/1/18 and after. This is actually a fair deal for non-homeowners; in the past many renters paid more tax than non-renters, which, in my humble opinion, was unfair. Why should a renter, who is losing equity by not owning, pay more income tax because he or she cannot itemize mortgage interest, PMI and property taxes? There is no reasonable “why” logic here, silly, this is tax law!

If you earn income from investments and do not have to work to live, you will continue to pay significantly less tax than those of us who work to create all of the good and services that you gobble up every day! Congratulations, you are sucking us dry and paying less tax for doing so. If you earned the money that you have invested, from which you are reaping such rewards, congratulations, you deserve it! If you inherited all of your income and you don’t work, don’t want to contribute, etc., well, you are a worthless loser regardless of what your friends tell you. But, hey, the system still loves you, so what does it matter what the masses think of you, right!

(Table 1) Married Taxpayers Filing Joint Tax Returns for tax year 2017 (old tax laws) vs 2018 (new tax laws). Due to additional tax (Alternative Minimum Tax) which will be added to income tax for couples with TAXABLE income of $75,000 or more, the tax savings listed below will likely be far less, and significantly less for households with taxable income over $175,000.

 

Note also that single persons with income under approximately $480,000 will enjoy significantly greater tax savings than their married counterparts (i.e. the new tax laws do not eliminate the archaic marriage penalty). Yes, you will save 10’s of thousands of dollars in your lifetime, possibly hundreds of thousands, simply by living with your significant other vs getting married. Yes, this is fact for almost everyone (but for the very wealthy).

Although under the new tax laws, some high income ranges are slated to enjoy an 18% – 20% income tax reduction (i.e. around $320,000 in taxable income seems to be the sweet spot), the additional AMT tax due will significantly or completely erode these higher earner’s tax savings. Remember, income tax and AMT are two separate taxes, calculate separately and differently, and no clear data has been released to-date regarding the AMT calculation details, but that AMT will remain and that the income thresholds to pay the additional tax are ridiculously low and unfair.

 

Table 1: Married Filing Jointly (2018)
Taxable
Income
Current
Rates
 Current
Tax Due
(Pre-AMT)
New
Rates
 New
Tax Due
(Pre-AMT)
Difference
() = Less Tax Due Under New Rates
% Tax
Reduction
         19,050 10.0%        1,905.00 10.0%        1,905.00                           – 0.0%
         25,000 15.0%        2,797.50 12.0%        2,619.00                    (179) -6.4%
         35,000 15.0%        4,297.50 12.0%        3,819.00                    (479) -11.1%
         45,000 15.0%        5,797.50 12.0%        5,019.00                    (779) -13.4%
         55,000 15.0%        7,297.50 12.0%        6,219.00                (1,079) -14.8%
         65,000 15.0%        8,797.50 12.0%        7,419.00                (1,379) -15.7%
         77,400 15.0%      10,657.50 12.0%        8,907.00                (1,751) -16.4%
         80,000 25.0%      11,307.50 22.0%        9,479.00                (1,829) -16.2%
         90,000 25.0%      13,807.50 22.0%      11,679.00                (2,129) -15.4%
      100,000 25.0%      16,307.50 22.0%      13,879.00                (2,429) -14.9%
      110,000 25.0%      18,807.50 22.0%      16,079.00                (2,729) -14.5%
      120,000 25.0%      21,307.50 22.0%      18,279.00                (3,029) -14.2%
      130,000 25.0%      23,807.50 22.0%      20,479.00                (3,329) -14.0%
      140,000 25.0%      26,307.50 22.0%      22,679.00                (3,629) -13.8%
      153,000 28.0%      29,947.50 24.0%      25,799.00                (4,149) -13.9%
      170,000 28.0%      34,707.50 24.0%      29,879.00                (4,829) -13.9%
      180,000 28.0%      37,507.50 24.0%      32,279.00                (5,229) -13.9%
      190,000 28.0%      40,307.50 24.0%      34,679.00                (5,629) -14.0%
      200,000 28.0%      43,107.50 24.0%      37,079.00                (6,029) -14.0%
      210,000 28.0%      45,907.50 24.0%      39,479.00                (6,429) -14.0%
      220,000 28.0%      48,707.50 24.0%      41,879.00                (6,829) -14.0%
      230,000 28.0%      51,507.50 24.0%      44,279.00                (7,229) -14.0%
      233,000 28.0%      52,347.50 24.0%      44,999.00                (7,349) -14.0%
      240,000 35.0%      54,797.50 24.0%      46,679.00                (8,119) -14.8%
      250,000 35.0%      58,297.50 24.0%      49,079.00                (9,219) -15.8%
      260,000 35.0%      61,797.50 24.0%      51,479.00              (10,319) -16.7%
      270,000 35.0%      65,297.50 24.0%      53,879.00              (11,419) -17.5%
      280,000 35.0%      68,797.50 24.0%      56,279.00              (12,519) -18.2%
      290,000 35.0%      72,297.50 24.0%      58,679.00              (13,619) -18.8%
      300,000 35.0%      75,797.50 24.0%      61,079.00              (14,719) -19.4%
      310,000 35.0%      79,297.50 24.0%      63,479.00              (15,819) -19.9%
      320,000 35.0%      82,797.50 24.0%      65,879.00              (16,919) -20.4%
      330,000 35.0%      86,297.50 32.0%      69,079.00              (17,219) -20.0%
      340,000 35.0%      89,797.50 32.0%      72,279.00              (17,519) -19.5%
      350,000 35.0%      93,297.50 32.0%      75,479.00              (17,819) -19.1%
      360,000 35.0%      96,797.50 32.0%      78,679.00              (18,119) -18.7%
      370,000 35.0%    100,297.50 32.0%      81,879.00              (18,419) -18.4%
      380,000 35.0%    103,797.50 32.0%      85,079.00              (18,719) -18.0%
      390,000 35.0%    107,297.50 32.0%      88,279.00              (19,019) -17.7%
      400,000 35.0%    110,797.50 32.0%      91,479.00              (19,319) -17.4%
      415,000 35.0%    116,047.50 35.0%      96,729.00              (19,319) -16.6%
      417,000 35.0%    116,747.50 35.0%      97,429.00              (19,319) -16.5%
      430,000 35.0%    121,297.50 35.0%    101,979.00              (19,319) -15.9%
      440,000 35.0%    124,797.50 35.0%    105,479.00              (19,319) -15.5%
      450,000 35.0%    128,297.50 35.0%    108,979.00              (19,319) -15.1%
      460,000 35.0%    131,797.50 35.0%    112,479.00              (19,319) -14.7%
      468,000 35.0%    134,597.50 35.0%    115,279.00              (19,319) -14.4%
      480,000 39.6%    139,349.50 35.0%    119,479.00              (19,871) -14.3%
      490,000 39.6%    143,309.50 35.0%    122,979.00              (20,331) -14.2%
      500,000 39.6%    147,269.50 35.0%    126,479.00              (20,791) -14.1%
      510,000 39.6%    151,229.50 35.0%    129,979.00              (21,251) -14.1%
      520,000 39.6%    155,189.50 35.0%    133,479.00              (21,711) -14.0%
      530,000 39.6%    159,149.50 35.0%    136,979.00              (22,171) -13.9%
      540,000 39.6%    163,109.50 35.0%    140,479.00              (22,631) -13.9%
      550,000 39.6%    167,069.50 35.0%    143,979.00              (23,091) -13.8%
      560,000 39.6%    171,029.50 35.0%    147,479.00              (23,551) -13.8%
      570,000 39.6%    174,989.50 35.0%    150,979.00              (24,011) -13.7%
      580,000 39.6%    178,949.50 35.0%    154,479.00              (24,471) -13.7%
      590,000 39.6%    182,909.50 35.0%    157,979.00              (24,931) -13.6%
      600,000 39.6%    186,869.50 35.0%    161,479.00              (25,391) -13.6%
      610,000 39.6%    190,829.50 35.0%    164,979.00              (25,851) -13.5%
      620,000 39.6%    194,789.50 35.0%    168,479.00              (26,311) -13.5%
      630,000 39.6%    198,749.50 35.0%    171,979.00              (26,771) -13.5%
      640,000 39.6%    202,709.50 35.0%    175,479.00              (27,231) -13.4%
      650,000 39.6%    206,669.50 35.0%    178,979.00              (27,691) -13.4%
      660,000 39.6%    210,629.50 35.0%    182,479.00              (28,151) -13.4%
      670,000 39.6%    214,589.50 35.0%    185,979.00              (28,611) -13.3%
      680,000 39.6%    218,549.50 35.0%    189,479.00              (29,071) -13.3%
      690,000 39.6%    222,509.50 35.0%    192,979.00              (29,531) -13.3%
      700,000 39.6%    226,469.50 35.0%    196,479.00              (29,991) -13.2%
      710,000 39.6%    230,429.50 35.0%    199,979.00              (30,451) -13.2%
      720,000 39.6%    234,389.50 35.0%    203,479.00              (30,911) -13.2%
      730,000 39.6%    238,349.50 35.0%    206,979.00              (31,371) -13.2%
      740,000 39.6%    242,309.50 35.0%    210,479.00              (31,831) -13.1%
      750,000 39.6%    246,269.50 35.0%    213,979.00              (32,291) -13.1%
      760,000 39.6%    250,229.50 35.0%    217,479.00              (32,751) -13.1%
      770,000 39.6%    254,189.50 35.0%    220,979.00              (33,211) -13.1%
      780,000 39.6%    258,149.50 35.0%    224,479.00              (33,671) -13.0%
      790,000 39.6%    262,109.50 35.0%    227,979.00              (34,131) -13.0%
      800,000 39.6%    266,069.50 35.0%    231,479.00              (34,591) -13.0%
      810,000 39.6%    270,029.50 35.0%    234,979.00              (35,051) -13.0%
      820,000 39.6%    273,989.50 35.0%    238,479.00              (35,511) -13.0%
      830,000 39.6%    277,949.50 35.0%    241,979.00              (35,971) -12.9%
      840,000 39.6%    281,909.50 35.0%    245,479.00              (36,431) -12.9%
      850,000 39.6%    285,869.50 35.0%    248,979.00              (36,891) -12.9%
      860,000 39.6%    289,829.50 35.0%    252,479.00              (37,351) -12.9%
      870,000 39.6%    293,789.50 35.0%    255,979.00              (37,811) -12.9%
      880,000 39.6%    297,749.50 35.0%    259,479.00              (38,271) -12.9%
      890,000 39.6%    301,709.50 35.0%    262,979.00              (38,731) -12.8%
      900,000 39.6%    305,669.50 35.0%    266,479.00              (39,191) -12.8%
      910,000 39.6%    309,629.50 35.0%    269,979.00              (39,651) -12.8%
      920,000 39.6%    313,589.50 35.0%    273,479.00              (40,111) -12.8%
      930,000 39.6%    317,549.50 35.0%    276,979.00              (40,571) -12.8%
      940,000 39.6%    321,509.50 35.0%    280,479.00              (41,031) -12.8%
      950,000 39.6%    325,469.50 35.0%    283,979.00              (41,491) -12.7%
      960,000 39.6%    329,429.50 35.0%    287,479.00              (41,951) -12.7%
      970,000 39.6%    333,389.50 35.0%    290,979.00              (42,411) -12.7%
      980,000 39.6%    337,349.50 35.0%    294,479.00              (42,871) -12.7%
      990,000 39.6%    341,309.50 35.0%    297,979.00              (43,331) -12.7%
   1,000,000 39.6%    345,269.50 35.0%    301,479.00              (43,791) -12.7%
   1,050,000 39.6%    365,069.50 38.5%    320,729.00              (44,341) -12.1%
   1,100,000 39.6%    384,869.50 38.5%    339,979.00              (44,891) -11.7%
   1,150,000 39.6%    404,669.50 38.5%    359,229.00              (45,441) -11.2%
   1,200,000 39.6%    424,469.50 38.5%    378,479.00              (45,991) -10.8%
   1,250,000 39.6%    444,269.50 38.5%    397,729.00              (46,541) -10.5%
   1,300,000 39.6%    464,069.50 38.5%    416,979.00              (47,091) -10.1%
   1,350,000 39.6%    483,869.50 38.5%    436,229.00              (47,641) -9.8%
   1,400,000 39.6%    503,669.50 38.5%    455,479.00              (48,191) -9.6%
   1,450,000 39.6%    523,469.50 38.5%    474,729.00              (48,741) -9.3%
   1,500,000 39.6%    543,269.50 38.5%    493,979.00              (49,291) -9.1%
   1,600,000 39.6%    582,869.50 38.5%    532,479.00              (50,391) -8.6%
   1,700,000 39.6%    622,469.50 38.5%    570,979.00              (51,491) -8.3%
   1,800,000 39.6%    662,069.50 38.5%    609,479.00              (52,591) -7.9%
   1,900,000 39.6%    701,669.50 38.5%    647,979.00              (53,691) -7.7%
   2,000,000 39.6%    741,269.50 38.5%    686,479.00              (54,791) -7.4%