Many people are waiting with bated breath to find out what President Trump’s proposed tax reform will mean for them. While the law has not yet been voted into law, it looks like it might be. This makes this year’s tax planning especially tricky. While the new law would only affect 2018, not 2017, it affects what we should do before 2017 is over.
New Law Highlights
Let’s look, first, at the new law. There will be many changes, some of them with serious repercussions for the frum community.
Repeal of the alternative minimum tax: The repeal of the AMT is long overdue. It is confusing and unfair. It “caps” the amount of your tax deductions. Furthermore, it limits how many of your children are tax deductible. I would say that the repeal is “good for us” as it worked against people with large families.
Tax brackets will be changed: The House and Senate have different plans, so this is hard to predict. However, most of the middle class will see a tax reduction.
Reduction of taxes for corporations: Corporate tax is the most misunderstood thing on earth. Perhaps you have heard this mantra: “Corporations do not pay taxes, people do.” This means that if General Motors has to pay taxes, the cost of cars goes up, which is paid for by anyone who travels in a vehicle such as a car, bus, or taxi. It is also paid for by people who consume goods that are delivered by vehicle, such as food. This is a tax that is hidden inside the cost of all of our goods. Reducing corporate taxes will hopefully reduce the cost of goods and also bring back to U.S. soil corporations that have fled to low-tax locales overseas.
How the New Law Will Affect our Community
Certain important tax deductions will be eliminated: These are real estate taxes, state and local taxes, and medical expenses. The standard deduction, though, gets bigger: from $12,700 to $24,000. Sounds good, right? Indeed, this hurts the rich and helps the poor “big time.” But fasten your seatbelts and read on for the scary part: Children are no longer tax deductible!
Yes, folks, we will no longer get to deduct children or any other dependent. Obviously, that’s a big hit for frum people. In place of the deduction, there will be a more generous tax credit of $1,600 per child. Currently, the child tax credit is $1,000 in addition to a tax deduction worth $600 to $1,000 or more.
Significantly, the child tax credit is only for children under 17. To be clear: If your child is 17 on December 31, you do not get to claim the $1,000 child tax credit. That will eliminate many 11th graders. Wow. When I was in 11th grade, I was thinking about getting my driver’s license and not worrying about my effect on my parents’ taxes. With that said, currently, child benefits phase out as your income rises, so we have to see whether the new law comes with these phase outs.
So frum people are taking a big hit on this one. But there’s more: Many frum people support their grandchildren and take tax deductions for them. That’s gone too, which means that the tax benefit of supporting grandchildren is completely gone.
The American opportunity tax credit remains. Whew! This can be claimed for the first four years of college. However, the lifetime learning credit, which can be claimed after the first four years, is gone.
More Issues for our Community
Most frum people live in states with high state taxes, such as New York, California, and of course, Maryland. (In non-state-tax South Dakota, by contrast, there is only one frum Jew, the Chabad shaliach.) Furthermore, most frum Jews own houses and pay real estate taxes, so we are losing the deduction for that as well.
Imagine the loss to families in Monsey and Lawrence, who were enjoying a great tax savings on the $15,000 to more than $20,000 they pay in real estate taxes. They also pay state income taxes. (Residents in New York City pay lower real estate taxes, but they pay an income tax to New York City.) All these taxes were deductible on their federal returns, so that, if a taxpayer paid $30,000 a year in these taxes, it was costing him, say, $18,000. With the new law, his taxes would go up from $18,000 to $30,000, an increase of 66%. I think that is pretty staggering.
Furthermore, both Maryland and New York state income tax laws “follow the federal” in regards to itemized deductions. That means that they also allowed the deduction for real estate taxes. This means that people in these locations may see their state and real estate taxes rise by close to 70%, and these states will reap an unintended benefit when they no longer have to allow the deduction.
As I mentioned above, the standard deduction is going up, from $12,000 to $24,000. If you itemize, you will take the higher amount. There is only one problem: There is not too much left to itemize! I would say that most frum people – perhaps a significant majority – will no longer itemize. This means that the true cost of home mortgages and charity will rise. In the past, when people gave charity, they felt that the government was subsidizing their donation. This will no longer be true.
To summarize, frum people will lose the tax benefits of children, state taxes, real estate taxes, and, by default, charity and mortgages. On the positive side, the child tax credit will be increased, and the alternative minimum tax will be gone. Furthermore, the corporate tax is reduced, which will for sure trickle down to everyone. Bottom line: I think we are going to lose money on the deal, big time!
Here’s what I think accountants will be advising if these provisions come to pass:
1) If you own a business, you will employ your child, so that they can file separately and take their own standard deduction of $12,000. The law says they have to really be working, of course.
2) “Bunching” will become a very popular strategy. People will try very hard to give their charity every other year. One year, they will claim a lot of charity and the next year they will give none and just take the standard deduction. Please reread my article on bunching from a few months back.
3) Family members who give small amounts of charity might gift their charity dollars to one wealthy relative, who will, in turn, give to the charity, so that at least someone can benefit.
4) Nonprofits will increase advertising shtick. That means that businesses will give charity by taking out ads in journals since that is deductible and their charity is not.
5) In pure economic theory, the price of houses will drop, because the tax savings of home ownership will be mostly gone. If I were a congressman poised to vote on this bill, this one item alone would send shivers down my spine.
What to Do Before 2017 Ends
Now, here is some advice on what to do before December 31 in anticipation of the new bill.
1) This might be the last year you can claim real estate taxes and state and local taxes. If you pay your 2018/19 real estate taxes now, before 2017 ends, you can benefit from them now.
2) If you claim medical expenses for 2017, pay off as much as you can before the year ends.
3) If your child is able to claim the lifetime learning credit, max it out.
4) And, of course, you can pay 2018 income taxes early. Fill our form 502d, and write on top in big red letters that it is for 2018. Mail the form with a check certified. If you can only afford to prepay real estate taxes or state income taxes, then I would pick real estate taxes, since they are deductible for both federal and state.
5) Lastly, clean out the house and give all your unwanted junk to Goodwill. This might be the last year you can do so. You can claim the fair market value of whatever you give, so now’s the time.
In addition to the above, make sure to check out my December 2016 article offering basic year-end advice, which you can find at www.wherewhatwhen.com. It covers such topics as the earned income credit, coordinating college spending to max out tax credits, child care expenses, and the nanny tax. Also discussed are claiming children over age 23, debt forgiveness income, job expenses, lawsuits for damages, and timing marriage dates.
The experts have analyzed this new tax proposal and concluded that most middle-class people will see their income taxes fall somewhat. If these experts were analyzing frum families, however, they would be saying that their taxes will definitely rise.
I am opposed to the new law – not because it hurts frum people. I am opposed because it no longer encourages home ownership, charity, and children. Government tax policy has a great effect on our behavior. If the government recognized that, they would change their approach so as not to discourage those worthwhile – indeed, crucial – activities.
The government needs to raise taxes somewhere, however, if they are going to cut out the AMT, corporate taxes, and estate taxes. If I were running this country, I would take a different approach. I would attack welfare, which we all know discourages work. Some government programs are just ridiculous. For example a person on Medicaid gets free prescriptions. I don’t see why they cannot afford a five dollar co-pay if they can afford $10 for cigarettes (and always seem to have money for tattoos).
I would also raise taxes by encouraging good behavior and discouraging bad behavior. For instance, I would increase the “sin” taxes. I would also increase federal taxes on gasoline, which would promote smaller cars and carpooling. Perhaps there could even be a federal tax on commuting unless it is done as a carpool. This would help air pollution problems as well has our balance of trade. There are many ways to increase taxes to discourage waste and unhealthy behavior.
Eli Pollock CPA can be reached at firstname.lastname@example.org.