Here are more details of and commentary on the "Tax Cuts and Jobs Act" as finally revealed – the “fleshing out” of the cocktail napkin scribblings.
As I have said in the past, my interest in and comments on the Act are not from an economic point of view – who pays more and who saves more. With any tax reform legislation, I look at it in terms of tax policy and of simplification and fairness.
Although I am a tax professional, and in theory my Business benefits from continued complication, I strongly believe that tax simplification, even in the extreme, would not result in a loss of clients or of income. It would only greatly reduce the agita, aggravation and anxiety related to 1040 preparation.
A very important “disclaimer” that I should have included in Friday’s post on the details of the Act. Everything I posted Friday, and below, is “proposed” tax legislation. None of it is actual tax law. Chances are very good that any final bill signed into law will be different, perhaps very different, then what I have identified and discussed then and here. And it is also possible that no tax Act will actually be passed.
* The limited deductions for acquisition debt mortgage interest (on new home purchases) would apply only to your one primary personal residence – the home you live in. I support the reduction in the acquisition debt threshold, the repeal of the deduction for home equity interest, and limiting the deduction for mortgage interest to one primary residence.
* The limited deduction for real estate taxes, up to a maximum of $10,000, appears to be available for taxes paid on the home you live in and vacation homes. The $10,000 limitation applies to all homes combined. I oppose the dollar limitation on the property tax deduction, but I would want the deduction to be limited to your one primary personal residence – the home you live in – like the deduction for acquisition debt interest.
* My Friday post stated that alimony paid would no longer be deductible. This means that alimony received would no longer be included in taxable income. I agree that this certainly simplifies the issue – but I don’t know if I support this. I think the current system is actually “more fair”. I would perhaps limit the deduction to actual payment of “spousal support” and no longer allow an alimony deduction for expenses paid to a third-party on behalf of the former spouse, such as health insurance.
* Currently a business can deduct 50% of “entertainment” expenses if it “establishes that the item was directly related to the active conduct of the taxpayer’s trade or business”. An expense is considered directly related if “it is associated with a substantial and bona fide business discussion”.
But under the Act “no deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes”.
Also – “In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee).”
I have mixed feelings about this change. I do realize there is much abuse of the entertainment deduction, even at the 50% level, especially by closely-held businesses. But in many cases business entertaining is as important, and legitimate, an expense as advertising.
I have always had concerns about the 50% limitation on business meals. I realize that the employee or business owner has to eat anyway – but there are often more than two clients at a business meal, and even though the employee/owner has to eat anyway, not necessarily at the same level of out of pocket expense.
In general, I don’t support the concept of the government determining what is an “appropriate” business expense – other than to disallow a deduction for expenses that are illegal or discriminatory. It is one thing if company gyms are available to all employees and another if use is limited to corporate officers and high-level executives.
* While the Act keeps the Child and Dependent Care Tax Credit, the employer-sponsored Flexible Spending Account for child and dependent care, with up to $5,000 of employee contributions treated as “pre-tax”, is repealed. This often provided a better tax benefit than the Form 1040 credit. Also gone is the tax-exempt treatment of the first $5,250 of “Employer-Provided Educational Assistance”. I am not sure if I support either of these changes – although I can live with them.
* Currently interest on municipal “Private Activity Bonds” are exempt from taxation under the “regular” income tax, but are taxable under the dreaded Alternative Minimum Tax AMT). The Act does away with the AMT, but interest on all “private activity” municipal bonds issued after 2017will be fully taxable as ordinary income, the same as the interest on corporate and savings bonds.
* I am curious to see how the final federal tax law changes will affect state tax returns. Most state returns, except for at least NJ and PA that I know of, begin with the federal AGI and allow most federal itemized deductions – except for state and local income taxes. And most state tax returns also allow for the same number of personal exemptions that are claimed on the federal return. State returns do not always follow the federal Standard Deduction allowance – several have their own lower state Standard Deduction. If individual state tax laws do not change, and the federal AGI and Schedule A as changed is used, state income taxes, no longer deductible on the federal return, will certainly increase.
In terms of year-end tax planning – the traditional strategies most certainly apply. Accelerate deductions to be claimed in 2017 - especially deductible medical, job-related and tax preparation expenses and state income and local income or sales taxes. And postpone the receipt of taxable income until 2018.