Dear Client and Friends:

The Proposed New Tax Law

When the politicians and the news media talk about “Tax Reform” the discussion is more about politics than tax law. I’m no politician (Thank You God!) so I will talk about the facts and personal family economic impact of the proposed new tax law.

Todd Cowart, my friend and a key member of our team, recalculated his own 2016 tax return and discovered, much to his surprise, that he had a $3,000-plus tax increase! He was concerned and asked me to take a closer look at the proposed new tax law.

Of a dozen tax returns that I recalculated using the proposed new tax law, only one, a very high income individual, had a modest tax decrease. Eleven of twelve tax returns showed a significant tax increase!

My first point is this: the new tax law is not a tax reduction for most people!

If you have a taxable income above $250,000 you may have a tax reduction, but, even at this income level, the loss of certain key deductions, exclusions and tax credits do not guarantee a person at this income level any tax relief whatsoever.

The proposed provisions of the new tax law will do a number of unexpected things:

Personal exemptions repealed. The Act would repeal the deduction for personal exemptions (under current law, for 2018, $4,150, subject to a phase out for higher earners), as well as the personal exemption phase out. (Act Sec. 1003).

If you have a large family (my eldest son has four kids) this is a tax increase.

There is a proposed Maximum Rate on Business Income of Individuals; I have no idea exactly how to interpret this yet. The language in the proposal is intentionally vague. Politicians use intentionally vague language like Michelangelo used a paint brush.

If this means:

• All S-Corps and LLC are taxed at a maximum 15%; then this is a real tax reduction on small businesses.
• If this applies only to big businesses and Sub-Chapter “C” businesses, then it will have zero positive benefit on small business.

This is a very important distinction. Historically, tax reductions on businesses have been targeted to big businesses. This has limited economic benefit for the simple reason that the heavy lifting in our economy is done by small businesses.

Small businesses make up: 99.7 percent of U.S. employer firms, 64 percent of net new private-sector jobs, 49.2 percent of private-sector employment, 42.9 percent of private-sector payroll, 46 percent of private-sector output, 43 percent of high-tech employment, 98 percent of firms exporting goods, and 33 percent of our nations export value.

Economic policy that focuses on big businesses will have very limited positive economic impact. Economic policy must, by necessity, focus on small businesses.

The Child Tax Credit will be increased. That’s a good thing. The Act would increase the amount of the child tax credit from $1,000 to $1,600. The Act would also increase the phase out from $110,000 to $230,000 for joint filers. Really Good! But, he who giveth can also taketh away, the Child Tax Credit will no longer be entirely refundable. Even here there is a sneaky little tax increase tucked in the law. I say sneaky, which I admit is an emotionally loaded word, because the restrictions on the refund ability of the child tax credit will only impact lower bracket taxpayers.

Back Door Tax Increases:

The Act would repeal:

• The credit for individuals over age 65 or who have retired on disability; and
• The adoption credit.

I admit that these two tax increases bother me. To increase taxes on the elderly and disabled as a part of an overall business tax reduction plan somehow does not seem fair.

The adoption credit is, to me, a big deal. My family has been impacted by adoption. I have a beautiful adopted grandson; I cannot imagine our family without Ryder. To increase the costs of adoptions to pay for business tax breaks seems a bit mercenary. (I know, I know, I keep using these emotionally loaded words; emotional loading does not mean the description is inaccurate.) Perhaps jaded would have been a better choice of word?

More Back Door Tax Increases:

Mortgage interest deduction retained, but with new limits.

For newly purchased homes, the mortgage interest deduction will be allowed on mortgage amounts of less than $500,000 ($250,000 for a married individual filing separately). (Act Sec. 1302). This is bad for the housing market and it will make the transition to the middle class more difficult. This will be an economic drag.

The Act would also limit taxpayers to one qualified residence. In our highly mobile society, it is not uncommon for families to own two homes for a period of time. Highly mobile people who own two homes in our economy are most often middle class; we have here a middle class tax increase.

State and local property tax deductions are limited. The Act would eliminate the deduction for State and local income or sales tax (see below), but would retain the deduction for real property taxes, subject to a $10,000 maximum. Here, in the sunny South, not a problem; taxes are low. In urban areas and in the rest of the country, State and local taxes are much higher. This is a tax increase.

Other Repeals:

Personal casualty losses under Code Sec. 165 (subject to an exception for disaster losses under the recent Disaster Tax Relief and Airport and Airway Extension Act of 2017); (Act Sec. 1304)

Also:

• State and local income taxes and sales taxes; (Act. Sec. 1303). Once again, it is good to live in the sunny South where we enjoy low taxes.
• Tax preparation expenses under Code Sec. 212; (Act Sec. 1307). Whoa-whoa; slow down here; this is a Sacred Cow! You can’t deduct your CPA fees!!! Give me a break!
• Alimony payments under Code Sec. 215. (I admit, this does not bother me too much; alimony is one of the very few purely personal expenses that enjoy a tax deduction.)
• Moving expenses under Code Sec. 217; (Act Sec. 1310). In a highly mobile society or in ministry where people move often, this is harsh!

Here are two things that really bother me – a lot!

The proposed new act will eliminate the deduction for unreimbursed business expenses on IRS Form 2106. Expenses attributable to the trade or business of being an employee under Code Sec. 262, will no longer be tax deductible.

Why does this bother me? This provision will disproportionally impact members of the Clergy. Ministers often have substantial unreimbursed required business expenses. This is a significant middle or lower middle class tax increase.

My biggest problem with the new tax law:

• Medical expenses under Code Sec. 213 will no longer be tax deductible!

Chronic Illness and Disability

I have a 35 year old client who was physically and mentally crippled in an auto accident at age 18. Every dime he earned in interests and dividends from his financial settlement is spent on his care; 100% of his income is devoted to his physical and medical care. His taxes will go from zero to sky high!

Elder Care

I have, thank God, very few “elder care issues”. Many of my clients do have elder care issues. The repeal of medical expense deductions is a disaster for elder care issues.

The rational of increasing taxes on some of our weakest and most vulnerable citizens escapes me.

Nursing Home Expenses

Nursing home expenses, currently deductible, will no longer be tax deductible.  This is BIG!

Other repeals

• Employee achievement awards under Code Sec. 74; (Act Sec. 1403)
• Dependent care assistance programs under Code Sec. 129; (Act Sec. 1404)
• Qualified moving expense reimbursements under Code Sec. 132; (Act Sec. 1405) and
• Adoption assistance programs under Code Sec. 137. (Act Sec. 1406)

The Spin Doctors!

Let the spin doctors and politicians tell you what they want to but the take away from simple reading of the proposed new tax law are these:

• This is not middle class tax friendly. This is a significant tax increase on low income and middle class taxpayers.
• Unless the largest majority of the still top-secret business tax cuts go to small businesses, this is not going to have any discernable impact on the national economy.

What to do?

Feel free to share my email with whomever you want. Be politically proactive. Voice your concerns about this tax law.

Conclusion

As always, I am pleased and proud to be your CPA and/or your friend.

Sincerely,

Steve Richardson, CPA