TAX CUTS AND JOBS ACT OF 2017 – 2018 TAX YEAR REVIEWED 0131-ctm-taxseasontipsqa-schlesinger-1771776-640x360-2-1


As we prepared tax returns for 2018, we noticed a few different pros and cons based on the enactment of Tax Cuts And Jobs Act of 2017. The following will be highlights of a couple of the groups who had that surprised look on their face as they learned what the new tax laws were doing to their tax results.


One of the biggest surprises hit the people who earn income as payroll and receive a W-2 at the end of the year and these same people are the ones who spend some of their own money  for work and are not part of a qualified reimbursement plan to receive those funds back tax free. The jobs that are included this group are outside sales, firefighters, nurses, and delivery people who all spend money out of their pocket, and utilize their own supplies and vehicle for their employer. We used to be able to deduct these expenses on Schedule A as Miscellaneous Itemized Deductions, and for 2018 that category has been completely removed.  The effect of this is that the employee does not receive any more income or assistance by deductions which basically creates results that pays more in tax on the income received.


Another group of people who are adversely affected by the new tax law changes, specifically Californians, are the high-dollar home buyers with mortgages over $750,000. Included areSnowmassVacationHomes_800x350 the second residences and vacation homes as part of this newer set of limits for mortgage interest that is deductible on Schedule A  Itemized Deductions. State and local income taxes and property taxes were also limited to $10,000 which effect this same exact group in a similar fashion. This reduction is also part of Schedule A  Itemized Deductions. The combined factor of the same effect on two different portions of Schedule A  Itemized Deductions gave people with this situation a noticeable difference in their net deductible expenditures, and ultimate tax results.


Also affected by the new tax law changes were Stock Investors with large managed portfolios. These types of accounts usually have full time account managers doing the analysis and the feeSTOCK INVESTORs are charged as a percentage of the portfolio.  Whether or not these fees were paid out of the funds invested or out of other funds, they were usually deductible as part of Schedule A Miscellaneous Itemized Deductions. As this deduction category completely went away, so too did the associated costs related to the earnings on these accounts.


The Pros, positive effects, were for the group of people who benefited from the application of the Tax Cuts And Jobs Act of 2017. This group includes Business owners, Sole Proprietors, LLC owners, and S Corp owners.  This category of people got the benefit of consistent and better depreciation allowances on purchases of equipment, deductibility of repairs, and a new deduction called the qualified business income deduction as a maximum of 20% of the net taxable income from the activity. All these people pay income tax on their personal tax returnMOMPOP BUSINESS for the business they operate actively during the year. When meeting the qualifications, these additional deduction areas continue to give business owners more tax breaks and return on their income, and efforts. C corporation owners are in this group as well.  They receive a better tax structure, more of a flat tax system going forward which minimizes the spikes of income tax created by higher income years in those entities.


Some may have noticed reduced deductions in their Schedule A Miscellaneous Itemized Deductions and yet also noticed a positive effect in another area. One of the group’s in the previous negatively affected grouping above, the large Stock Investor group, are one of those that received benefits in another area. With the lowering of long-term capital gains to a flat 20% or lower than your current bracket, this includes a portion that can be tax free. The reporting of these capital gains occurs when stocks and Investments are sold at a price higher than they were purchased. This also applies to people who invest in real estate, often a long-term investment where, in California, we see large gains created. Whether it is annual stock selling, or the selling of a rental property or personal home that may have capital gains associated with it, we saw the combination of the lower capital gains tax and a reduction of the effect of Alternative Minimum Tax on the ultimate tax cost of these capital events. When you consider it may have taken 20 or 30 years for a home to have appreciated before someone has sold, to pay all the tax in one year on this accumulated gain can be a big amount. family-hispanic-young-hugging


There were a couple of other changes in the new tax laws that created positive outcome for groups on either end of the age spectrum. Young people starting families and those with older children, received larger tax credits, $2,000 each while still maintaining Child Care credits and college credit availabilities. The effect of these credits both offset their actual tax liability, and allowed for more refundable credits – money back to them.

The other age-related positive results were to the retired or retiring baby boomers. with the increases of the standard deduction to $12,000 individual and $24,000 for married couples, not owning a home or having a mortgage is not as important in utilizing deductions to lower taxes.  The government has raised these standard deductions and so now people in retirement years are no BABY BOOMERSlonger losing out once they have paid off their personal home and have limited other itemized deductions to use to lower their taxes.


This recap of the 2018 tax season shows many positive results for people with the higher Standard Deduction even though several felt the negative effects from the changes to the Schedule A Miscellaneous Itemized Deductions.


Steven Z. Freeman, CPA, and the FREEMAN & ASSOCIATES team, provides Tax Preparation services and can assist you with any actual calculations on your Tax Returns. If you have any questions on this matter or to schedule a complimentary initial consultation, please contact us at (805) 495-4211


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