Tax Reform: The Good, The Bad & The Ugly

Transcriptions

Segment 1 Transcription

00:01 Danny Howes: Well, good morning, Vero Beach. Welcome to The Financial Pulse Radio Show. I’m your host Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome. Hope everybody’s had a great week thus far, first week back in the swing of things after the holidays. Sometimes I call it the holiday hangover. My kids get it where it’s almost like they get manically depressed. I got a 15 and a 17-year-old. After all of the excitement and everything and family and friends and gift exchanges and all that fun stuff, it’s back to reality. But I’m excited to be back to reality because we have lots of great things going on this year. The market’s at all time highs, and if you have your money invested in a market, I’m sure you’ve enjoyed great gains. And I hope it’s been a prosperous 2017 for you. And now we’re into 2018, and we’re still seeing unprecedented growth numbers in the marketplace. And now, we’re on the back side of this tax reform. That’s the largest tax reform, large tax bill in our lifetime so far. And it’s got a lot of great things and a lot of things to watch out for that going into 2018 and beyond, that we need to be planning for.

01:20 DH: So as a tax firm, East Coast Tax and Financial Planning, we are a full service accounting and tax firm. We handle accounting and taxes for small to medium size businesses, full charge bookkeeping and the like, as well as for individuals, retirees and families right here on the Treasure Coast, and really nationwide for our accounting firm. And then we also are a registered investment advisory firm, meaning that we manage money in the market for our clients, and we have model portfolios that we use, customized portfolios that we can do for our clientele. And then we also have an insurance agency where we handle things like annuities, life insurance, long-term care, disability insurance, things that have to do… Insurance products that have to do with retirement. We don’t handle Medicare subs or health insurance, or anything like that, but we handle things like that life insurance, long-term care, disability, annuities, and the like.

02:19 DH: So, going into tax season and nobody really likes to talk about this. This is that time of year where you’re just dreading, I understand. But you’re probably wondering what the heck happened with this tax bill? What does it mean to you? And it’s really all over the place, but one of the primary things to remember is that it does affect every single taxpayer out there, business and individual alike. There are lots of changes that have come down the pike. Some people aren’t gonna recognize very much of a change, if any at all in their tax bill. And then others are gonna realize some pretty dramatic changes. Now 2017 is really not much going on as far as changes go, unless you’re a business and you put some equipment or large purchases into effect after September 27, 2017, there’s some special provisions for you for the ’17 tax year. But other than that, there’s really no major changes for 2017 in this bill, it’s all for ’18 and beyond.

03:19 DH: But that being said, what I always am ringing the bell on and what The Financial Pulse is all about, helping you keep a pulse on your finances, your taxation, is that now is the perfect time to do planning for 2018. And what do I mean by planning? Well, if you were unnecessarily or unknowingly overpaying in taxes, when would you like to know? Would you like to know now at the beginning of the tax year? Or February, March, April of next year when you’re doing taxes, you’re preparing your taxes for 2018? You wanna know now. And so planning is ultra important. On our show, there’s only so much that we can get through, but if you are curious, if you’re a business owner or you’re a retiree or you’re a family just accumulating wealth, whatever it is. If you’re a taxpayer, let me put it that way, and you wanna know how this tax bill could affect you personally and financially and your business financially, you can give our office a call, 774-7970. That’s 774-7970. Or you could visit our website, eastcoasttaxandfinancial.com. Again, that’s www.eastcoasttaxandfinancial.com.

04:35 DH: Well, enough plugging, let’s talk about the tax reform and what it means. So many of you probably have already heard the sound bites of a lot of the highlights that the news likes to talk about, like the individual mandate for health insurance coverage. That ends after 2008, in other words, 2019 and beyond, according to the current bill, there will be no individual mandate, meaning there’s no requirement for you to carry qualified health coverage. However, that has been kicked down the road, in my opinion. I’m not gonna get political, but what I am gonna say is that we have midterm elections coming up. Part of the negotiations, they didn’t eliminate that mandate for 2017, they made it for 2018, which means a lot of things could change politically in that landscape between now and 2019. I am hopeful, because I’m a proponent of not being mandated to buy anything, that that will remain in place. However, just brace yourself and plan for the worst and hope for the best is what my opinion would be on that mandate. But 2017, you gotta have health insurance or have some kind of exemption as it relates to that.

05:54 DH: Well, let’s start with individual taxes. Standard deductions are gonna be doubling. So they’re gonna be doubling to $24,000 per couple and $12,000 for singles. So, that number is double from previous years, which is a huge increase, obviously. And it’s gonna be $18,000 for those people claiming head of household. So, if you’re a single and you’re not head of household, it’d be $12,000 for your standard deduction, and it’d be $18,000 if you’re filing as head of household. Okay, if you’re 65 or older, or up and blind people also get $1,250 more per person. So if you’re either 65 and older, or you’re blind, you get an extra $1,250 for your standard deduction, okay?

06:45 DH: And, let’s talk about what might be pared back, okay? Interest can be deducted on up to $750,000 in new acquisition debt on your primary residence and secondary home, okay? So that’s down from a million dollars, so it used to be that we could deduct interest on up to a million dollars on a home that we’ve purchased, whether it’d be a primary residence or second home. Now it’s been reduced to $750,000. It kinda went backwards on that. Now some folks listening might say, “Well, I don’t live in a $750,000 or million dollar home,” but there’s a lot of folks here in the Treasured Coast that do. These coastal properties that are second homes and so forth, so if you’re used to taking advantage of that, you’ve got to just rethink that and know and budget that you’re not necessarily gonna get that. However, for higher wage earners, for higher income folks, deducting mortgage interest up until now, AMT, alternative minimum tax, has phased out a lot of these deductions anyway.

07:46 DH: So, while it may sound scary that we’re losing a deduction there, or it’s actually getting reduced from a million to $750,000 worth of indebtedness on a home for mortgage interest deduction, it may not mean a whole big difference on your tax bill because you may have experienced phase outs anyway up until now.

08:08 DH: The other major squeeze, if you wanna call it that, on individuals in this tax bill is on state and local taxes. That’s both on property taxes and income taxes. So the maximum that you can deduct, combined between all state and local taxes, is gonna be capped at $10,000 going forward. So last year in December, we had a ton of people scrambling saying, “Should I pay my 2018 taxes now, so I can get deduction?” And so on and so forth. Well, there’s quite a few things to consider in that. And that is, again, if you are subject to AMT and you’re getting phased out on deductions anyway, chances are you weren’t getting the most out of your property tax deduction anyway in 2017 and before.

09:02 DH: So to add on another $10,000, $15,000, $20,000 worth of real estate taxes last minute at the end of 2017, really in a lot of cases, wouldn’t have made a difference anyway. So if you’re crying into your beer that you weren’t able to do that, don’t worry about that because it really probably didn’t affect you too much, if that was a big concern of yours anyway. But going forward, it does lower the threshold quite a bit on the combined state and local income taxes. Real estate taxes is only $10,000 is the cap. So that’s gonna affect a lot of folks in particular. But, now if you own rental real estate, the real estate that you’ve bought whether it be residential or commercial, it doesn’t matter, if you own rental real estate and you rent that out and you’re paying property taxes on those properties, those are fully deductible on your Schedule E, as part of your little profit and loss on your rental property.

09:56 DH: When we get back we’re gonna talk more and more about the new tax reform bill, how could, may or may not affect you. I’m Danny Howes for The Financial Pulse. We’ll be back in just a bit.

Segment 2 Transcription

00:00 Danny Howes: Well, welcome back to the Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of the East Coast Tax and Financial Planning. Hope everybody, if you’re just joining us, hope you’re bringing in the New Year great, and that this week has been great for you. It’s been kind of a crazy 2017 and already a crazy 2018 with record highs. Last week was just tremendous with the stock market and going into this week, nothing really much has changed. It’s just we’re really seeing a lot of great things in the economy, bank stocks has recently rallied because interest rates are going up.

00:40 DH: And that’s something to think about, if you’re a retiree or if you are somebody that has money in the market, and you are heavily invested in bonds, one thing that you wanna make sure of is that you are not at a lot of interest rate risk. Because things like utility stocks that pay out healthy dividends and preferreds and in bonds, if you are holding individual bonds and so forth, or funds that have bonds in them, those are at interest rate risk, meaning when interest rates go up, and if you’re holding on to those types of equities or those type of bonds, the value of those underlying assets could actually go down because you’re holding on to lower interest rate products.

01:23 DH: So, if I have a tenured treasury saying, that’s maybe at 2% and interest rates all of a sudden go up to 3%, my 2% bond isn’t going to be worth as much as it was before if I were to cash it out early. Now If I keep it all the way to maturity, I’m okay, I get my principal back but I’ll get my interest along the way. But if interest rates spike, and I wanna sell that bond before it matures, and I could see a loss on my principal as a result because of the change in bond prices. And the same thing, same kind of concept can happen with income driven type of equities like we see in utilities or if you hold on to preferred stock and so forth.

02:05 DH: So it is just something to keep in the back of your mind, bank stocks obviously seem to bode well when interest rates start to raise because they start to do better and get more profitable. But that’s just as a side note. Today, we’re talking about the tax reform bill and last segment we talked a little bit about some of the fact that we’re getting double the standard deduction. But then we’re also getting squeezed on a couple deductions like the home mortgage interest debt. If you buy a home and you have a mortgage of more than $750,000, then you’ll only be able to deduct the interest on the first 750 and that applies to a primary residence, and also to a second home.

02:47 DH: A lot of second homeowners here on the Treasure Coast, now it’s season, people are coming back. And if you’re listening to this show, that’s something to keep in mind if you got a nice home here, and you have a mortgage more than $750,000, chances are you’re going to have a phase out of your interest deduction. Now, if you have a lot of income anyway and over the years you’ve been subject to alternative minimum tax AMT, chances are you’ve had phase out of those deductions anyway. So your tax bill isn’t necessarily gonna change a whole lot as a result of that, if you’ve already been subject to those phase outs.

03:27 DH: Some other eliminations that we didn’t talk about last segment, but I’ll get into this segment, is that deductions for job related moves. If you’re being relocated, unless you’re part of the military, if you’re being relocated as a result of a job change, you’re not going to get that deduction anymore. And that used to be a huge deduction, companies move people from one place to another, that was a front of the tax return deduction that came right off of the adjusted gross income. Also, miscellaneous write-offs on your Schedule A, that are subject to 2% of AGI thresholds, these things would include like employee business expenses. Like if you work for a company and you have to buy boots, you have to buy certain equipment, and tools and the like, you used to be able to deduct those on your Schedule A.

04:18 DH: Now those deductions will not exist. If you have brokerage accounts, an IRA accounts, and you pay fees, investment management fees like 1%, 2%, those type of fees, those fees aren’t going to be able to be deducted either in 2018 going forward, according to this new tax reform law. And in also tax preparation costs. If you pay a couple hundred dollars or even more, $1000 plus for your personal income tax preparation, those fees are not gonna be deductible any longer. Along with theft losses, if you’ve had a theft, those losses won’t be able to be deducted either. A big huge change, and hopefully this doesn’t happen to you in your life anytime soon or ever, but a big change coming down the pike is alimony.

05:13 DH: So for divorces up through 2017, in most divorce situations, if there’s alimony involved, the person paying alimony gets to deduct that off their income, and then the person receiving the money is required to claim that as income on their tax return. 2018 and beyond, that’s not gonna be the case. It doesn’t matter what the court says, as far as who’s paying alimony, who’s receiving it or what not, the person that is paying the alimony will not be able to deduct it, and the person receiving the alimony, it’ll be tax free. They will not have to deduct or they will not have to claim that income as taxable income on the alimony that they receive.

06:03 DH: So that’s kind of a big, huge change and that’s gonna affect obviously a lot of domestic situations. So your charitable deductions contributions are going to remain preserved, so you don’t have to worry about that. Medical expense deductions is going to be enhanced. So a couple years ago when the Affordable Care Act came into play, those people that were 65 years old and younger, could… They had to have health… I’m sorry, medical expenses in excess of 10% of their adjusted gross income before they could begin deducting medical expenses. That’s actually gonna change, that’s gonna go back to 7.5%. That’s what it used to be forever.

06:50 DH: And then back when the Affordable Care Act passed, one of the changes was for younger folks, people that are pre-retirees, younger than 65, that threshold went up to 10%. So let’s just break this down to what that means, the medical deduction, because a lot of people are confused on it. It can be a little bit complicated to think about, but if I have a $100,000 to make numbers simple, if I have a $100,000 worth of income and I have medical expenses, okay? Previous to the tax reform, I would have to have at least $10,000 worth of medical expenses, that I pay out of pocket, before I could begin deducting.

07:34 DH: So the first $10,000 of my medical expenses aren’t deductible. So I have a $100,000 worth of income, if my threshold is 10%, then the first 10,000 is not deductible. Anything above and beyond 10,000 is. So if I have $15,000 worth of expenses, I get to deduct $5,000 is what’s gonna basically be my benefit on my tax return, as a result of my medical expense deduction. That’s now dropped to 7.5% for everybody. So regardless of age, that’s 7.5%. So if we go back to the $100,000 worth of income, and if I had my first $7,500 of medical expenses really aren’t going to help me, but anything above and beyond 7,500 is going to be deductible on my Schedule A income through as a tax benefit for me. So that is one positive that you get. And the personal gambling losses, if you have gambling losses to the extent of winnings, you can actually still deduct those, those were kept into place.

08:41 DH: One of the things that upper income individuals are gonna be able to take advantage of is the phase out of itemized deductions. So it used to be, especially with AMT coming into effect and so forth, the higher your income, there would be a phase out of your Schedule A itemized deductions. What are those? Things like mortgage interest, charitable deductions, medical expenses, state and local income taxes, real estate taxes, used taxes and sales tax, all those type of items, they’ll go on Schedule A in your personal income tax return. There were phase outs for people that were higher income earners.

09:30 DH: Phase outs have been completely eliminated. However, that benefit for Schedule A has the bar for that to benefit you has been raised because the standard deductions have all been doubled. So if you’re married filing jointly, you’re automatically getting $24,000 in your standard deduction, meaning that you have to have more that $24,000 in itemized deductions, in order to be able to have the benefit to itemize. And they’ve lowered the mortgage interest deduction and they’ve said that state and local income taxes and real estate taxes are kept to 10,000 which lowers that even more. So there’s gonna be a lot more standard deduction filers and itemized filers than it was before.

10:11 DH: Well, that’s all we have for today. If you want more information, go to our website, East Coast Tax and Financial Planning or just give us a call if you want an analysis done for your future taxes, 2018 and beyond. 772-774-7970, I am Danny Howes, for the Financial Pulse, every single Thursday here at 10:30 AM, right here on WAXY radio. Make sure you’re protecting that money folks but most importantly make sure you know who and what you’re protecting it from. We’ll talk to you next week.