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An ongoing series of informational entries on taxes and finances by Evangeline Giron

The Good, The Bad and The Ugly on New Tax Plan

May 4, 2018

We're a bit delayed with this article but it's not too late to plan for the rest of the year. As is probably the major gist of my discussions with the approximately 2,000 clients we served during the 2018 tax season..... 2019 tax filing would be so different and it's best to lay out a plan to deal with the sweeping tax changes that the Tax Cuts and Jobs Act under President Trump has implemented in late 2017.


With all the publicity and propaganda of it being good for the middle class..... not necessarily true across the board, especially for the clientele we serve in California. In fact, most of our clients are probably going to turn out shelling out more income taxes than it was in prior years.


The nurses and healthcare workers working lots of overtime, second job, home health and earning between $125,000-$350,000 are going to be so disadvantaged.

First of the bad and ugly...... SALT (State and Local Tax) limitation of $10,000 per return. This includes income, property and real estate taxes. I've seen state income tax withholdings alone at $22,000 for 2017. At these income levels, it is very common to see income tax withholding at least at $8,000. For ordinary (not luxury) new houses bought in Los Angeles, it's easy to see property taxes starting at $8,000/year. Add the new car sales tax, DMV registrations, etc...... and it's easy to see a family having SALT totaling $20,000. I've seen one couple with a whopping $42,000 of SALT in 2017!


What does this mean in 2018 (taxes processed in 2019 tax season)? It means any SALT paid beyond $10,000 would be forfeited. For mathematical purposes, if your SALT is $20,000, you've forfeited $10,000 deduction. At 24% tax bracket, that's equivalent to $2,400 more in taxes you need to pay with the IRS. At 32% tax bracket, that's $3,200 more in taxes....... but whooopppssss...... that's not the end of the dilemma.


All miscellaneous deductions have been eliminated. This includes unreimbursed employee expenses, tax preparation fees, among others. What are unreimbursed employee expenses? The mileage for traveling from one job site to another (big trouble for home health and traveling healthcare workers, those who work multiple jobs who are not reimbursed by their employers), uniforms, trainings, seminars, continuing education, licenses and regulatory fees, tools and supplies, professional dues, subscriptions, union dues, dry clean and upkeep, job search expenses, meals.... and the list goes on. For a home health worker who earns $100,000 a year, you could easily add up to $20,000/year of unreimbursed employee expenses due to the mileage travels. On a 24% tax bracket, that's another $4,800 in additional taxes for the IRS.


Just as when you thought you're having a migraine on how much more taxes you have to pay, the elimination of the personal exemption comes into play. Oh, yes, proponents like the Republican lawmakers say the standard deduction has almost doubled. For example, a married couple filing jointly had $12,600 in standard deduction in 2017 while it will become $24,000 in 2018 (that's $11,400 more). Big change for the better is what they wanted you to believe. But wait a second..... they removed the personal exemptions, which would have been $4,100 per person in the household in 2018. If they have 3 dependents on their tax return, this couple would end up losing $20,500 in personal exemptions for 5 people. At 24% tax bracket, here's to another $4,920 tax burden. And most probably, this family can't even take advantage of the increased standard deduction because they would be using the itemized deduction being the mortgage interest, taxes, etc. are much higher than would have been compared to a resident of Ohio or North Dakota.


But here's to the good, albeit very trivial compared to the bad...... child tax credit (children up to 16 years old) is up from $1,000 to $2,000 each child and the threshold for claiming it in full has been dramatically been increased from $110,000 to $400,000. If you have three minor children, that adds $3,000 back to you, $6,000 if you earn more than $150,000 because you would not have received any credit in the prior years with that income.


Alternative minimum tax has been increased from $108,000 to $1,000,000 but here's the caveat..... they've removed the miscellaneous itemized deductions anyway which mostly triggers the AMT on a wage earner. So I'm reluctant to call this the good.


Here you go..... a quick glance at the tax changes heading your way in 2019 tax season. My next blogs will cover more details on this.