Yesterday, The Congress and Senate passed the historic Tax Cuts & Job Act of 2017. Before the holiday “break” between Christmas and New Years, I wanted to provide you with a quick reference and summary of the major changes as well as a couple of examples of their impact.
First, you can view the summary of major changes provided by the National Association of Tax Professionals below:
In analyzing the final tax rates I used my personal tax return for 2016 to compare the changes. While I lost $6,299 in total exemptions and itemized deductions, I actually would have received a tax break of $2,240. I’m very happy that I can expect a similar result in 2018. On the other hand, I took a return from a taxpayer with more income than me, a child and much higher mortgage interest and real estate taxes and the results weren’t as good. For that household, their overall tax increased by $3,246.65 and they lost $22,206 of deductions with the updated tax rules.
At the end of the day, it does appear that the vast majority of middle America will benefit from the new act.
What this also says to me is that, the government has decided to curb the incentive to purchase homes through subsidies and itemized deductions. Based on the pace of real estate appreciation, especially in major urban areas, there is some logic to this. Chasing homes or any asset through tax subsidies inflates the value of the asset that an act of Congress can deflate.
Moral of the story? Those with little debt, living in affordable cities will emerge as huge winners.
Is there such a thing as a “tax benefit”? NO! Precisely for the reasons mentioned above. I receive calls often to give advice on making purchases based on the “tax benefit.”
There is no such thing as a “tax benefit”, it is an oxymoron!
You have to spend $1 today to defer $.25. The real question should be one you can answer yourself: Can I really afford this? Whether it’s a home, car or anything, if you need to stretch your budget with a tax incentive, the answer is, you cannot afford it. And, there is no guarantee any tax sweetener will last forever as we’re seeing now with the new Tax Cuts & Jobs Act of 2017 and if that incentive is wiped out by an act of Congress where will that leave you?
In any case, as you can see, I enjoy tax theory but there is always the practical minded client that will ask me and say, “okay Ted, what can I do right now to save a few dollars?” So the answer to that, right now, is you can pre-pay your real estate taxes for 2018 if you think you will exceed the $10,000 in combined state, local and property tax deductions, which most homeowners in Illinois will be able to do.
The problem is that in Cook county, only 50% of the next years tax is allowed to be pre-paid and you have to file a special form to do that. You have to check county by county for it’s specific rules and given they just jammed the legislation through at the end of the year, I’m not sure how easy or practical it will be to accomplish.
I do not advise doing this because you really don’t know what your income will look like for 2018 anyway. You can assume but can never plan.
I welcome your questions.