New cap on tax de­duc­tions could turn big re­fund into big tax bill

Texarkana Gazette - - MONEY MONDAY - By Su­san Tom­por

The big tax ques­tion of the year: Will you get a su­per-sized re­fund or sud­denly dis­cover that you’re go­ing to end up writ­ing one mon­ster check?

No one re­ally knows for sure in light of sweep­ing changes that hit home­own­ers, two-pay­check cou­ples and fam­i­lies who once had a string of item­ized de­duc­tions but no longer can take some breaks un­der the Tax Cuts and Jobs Act of 2017.

Tax­pay­ers are get­ting their first look at how the new tax over­haul hits their pock­et­books when they file their 2018 fed­eral in­come tax re­turns. The devil in­volv­ing those de­duc­tions, such as those for prop­erty taxes and state in­come taxes, is in the de­tails.

If you think you’re get­ting the same tax re­fund as last year—or even big­ger with the tax cuts— think again. It’s not that sim­ple. Some are ow­ing more money.

A Novi, Mich., home­owner told me he was shocked when he was smacked with hav­ing to write a big check to pay his tax bill af­ter he com­pleted his 2018 tax re­turn.

He owes more than $3,000 when typ­i­cally he re­ceived roughly a $4,000 re­fund in the past.

The cou­ple in their 50s both have jobs and re­ceive W-2s to re­port their wages. They pay about $9,000 in state in­come taxes and an­other $10,000 or so for prop­erty taxes on their Novi condo. Their chil­dren are older and don’t qual­ify for any child tax credit.

The home­owner told me that he un­der­stood there was a $10,000 limit on how much one could deduct for prop­erty taxes on the fed­eral re­turn, af­ter the ma­jor tax over­haul.

What he didn’t know: The $10,000 cap in­cludes much more than prop­erty taxes. The limit also im­pacts how much the cou­ple can deduct when it came to what they paid for state in­come taxes.

To­gether, what would have been more than a $19,000 de­duc­tion was lim­ited to $10,000.

“Your to­tal de­duc­tion for state and lo­cal in­come, sales and prop­erty taxes is lim­ited to a com­bined, to­tal de­duc­tion of $10,000 ($5,000 if Mar­ried Fil­ing Sep­a­rate),” ac­cord­ing to IRS Pub­li­ca­tion 5307, which out­lines ba­sic changes in the tax pack­age.

“Any state and lo­cal taxes you paid above this amount can­not be de­ducted.”

WILL YOU BE ABLE TO DEDUCT STATE IN­COME TAXES?

Many home­own­ers who item­ize need to dig a lit­tle deeper into what’s known as the new SALT tax cap—the state and lo­cal tax de­duc­tion.

The limit cov­ers how much you can deduct when it comes to prop­erty taxes, state and lo­cal in­come taxes, and sales tax, even li­cense plates on cars in some states, such as Michi­gan, said Leon LaBrecque, chief growth of­fi­cer for Se­quoia Fi­nan­cial Group in Troy.

“I’m a good ex­am­ple,” LaBrecque said. “I pay a lot of Michi­gan in­come taxes, plus prop­erty taxes on two houses, plus li­cense plates.”

Add all those taxes up, in­clud­ing the real es­tate taxes paid on his cot­tage, and he’s well over the new $10,000 limit for de­duc­tions.

Where peo­ple can run up against this limit: A larger prop­erty tax bill; a higher-in­come house­hold; dou­ble-in­come W-2; mul­ti­ple homes, like a cot­tage, LaBrecque said.

For ex­am­ple, a Michi­gan cou­ple mak­ing $150,000 in in­come would pay around $6,500 in Michi­gan state in­come taxes. A home with a value of $165,500 might in­volve prop­erty taxes of $2,500 or higher in Michi­gan. And then state li­cense tabs on a cou­ple of cars (listed on Sched­ule A for those who item­ize as “per­sonal prop­erty taxes”) could be $300 or $350.

If the cars are newer and nicer, the cost of the li­cense tabs is higher.

LaBrecque says his li­cense tabs cost $800. He has a 2016 Jeep Grand Chero­kee, 2016 Ford F-150, a 2015 BMW 550 and a 2017 Ford Es­cape.

The IRS also notes that: “No de­duc­tion is al­lowed for for­eign real prop­erty taxes. Prop­erty taxes as­so­ci­ated with car­ry­ing on a trade or busi­ness are fully de­ductible.”

WHAT HAP­PENS IF YOU HAVE A COT­TAGE?

We heard much about how some tax­pay­ers would be hard hit by the cap in high-prop­erty tax states, such as New York, New Jersey and Con­necti­cut.

But res­i­dents in Michi­gan are get­ting hit too, for var­i­ous rea­sons.

“The vast ma­jor­ity of my clients are get­ting clipped due to the SALT ceil­ing,” said Ge­orge W. Smith, a cer­ti­fied pub­lic ac­coun­tant with his own firm in South­field.

The ones get­ting hit of­ten have higher earn­ings and pos­si­bly a se­cond home, such as a cot­tage or a va­ca­tion home, he said.

One client has a va­ca­tion home on the Ch­e­sa­peake Bay along the East Coast and will lose about $20,000 in state and lo­cal tax de­duc­tions. She is sin­gle and will pay about $4,800 in in­come taxes.

The im­pact on the bot­tom line of the tax re­turn, though, de­pends on whether they might no longer need to item­ize be­cause they can take ad­van­tage of the new stan­dard de­duc­tion of $12,000 for sin­gles and $24,000 for mar­ried cou­ples fil­ing a joint re­turn.

“Some are ben­e­fit­ing from that re­gard­less of the SALT cap,” Smith said.

Some well-to-do fam­i­lies will be harder hit, of course.

In Michi­gan, for ex­am­ple, you’d hit the $10,000 limit with state in­come taxes alone if your in­come sub­ject to state in­come taxes was greater than $235,294 in 2018, ac­cord­ing to James P. O’Ril­ley, tax di­rec­tor for Do­eren May­hew in Troy. That’s based on the state’s 4.25 per­cent in­come tax.

As a re­sult, many peo­ple are los­ing sig­nif­i­cant item­ized de­duc­tions. Some may no longer item­ize and will in­stead take a higher stan­dard de­duc­tion.

Some higher-in­come fam­i­lies would re­ceive no tax fed­eral tax break on their real es­tate taxes or a lim­ited ben­e­fit, O’Ril­ley said.

“The $10,000 limit on taxes has what I be­lieve to be many un­in­tended con­se­quences,” O’Ril­ley said.

He’s had clients say they’re con­sid­er­ing mov­ing from Michi­gan to Florida, which does not have a state in­come tax, in light of the new fed­eral changes.

DON’T BANK ON A BIG TAX RE­TURN

For many peo­ple, it’s a real sur­prise to see how their tax re­turns are play­ing out this year.

Just be­cause you’re get­ting a tax cut un­der the new rules doesn’t mean you’re go­ing to see a tax re­fund in the spring.

Many peo­ple al­ready saw much of their tax break via their pay­checks in 2018 when the tax with­hold­ing tables were changed and al­lowed work­ers to see an im­me­di­ate break in take­home pay.

Some got more money dur­ing 2018 than they should have un­der their tax sit­u­a­tion. And they will have to pay that back once their taxes are pre­pared and filed by April 15.

“And that’s go­ing to be a bad sur­prise for a whole lot of peo­ple,” said Chris­tine Ish­man, pres­i­dent of North­ern Fi­nan­cial Ad­vi­sors in Bloom­field Hills.

Ish­man, an en­rolled agent who pre­pares tax re­turns, said about 75 per­cent of her clients are pay­ing more than they’d ex­pected this tax sea­son for a va­ri­ety of rea­sons.

Some lost key tax de­duc­tions. For ex­am­ple, the miscellaneous de­duc­tion was elim­i­nated and one can no longer deduct job hunt­ing ex­penses, mov­ing ex­penses re­lated to a new job, un­re­im­bursed em­ployee costs, tax prepa­ra­tion fees and the like.

The costs of such items could have been de­ducted once ex­penses ex­ceeded 2 per­cent of your ad­justed gross in­come.

Take the case of the Novi cou­ple. Un­der the new tax rules, they will still item­ize but they lost miscellaneous de­duc­tions, ac­cord­ing to Ish­man who pre­pared their re­turn.

Like other tax fil­ers, they also lost four ex­emp­tions for them­selves and two chil­dren in col­lege—which were $4,050 each on their 2017 re­turns. Each per­sonal ex­emp­tion re­duced gross in­come by $4,050 on 2017 re­turns. The ex­emp­tion phased out for higher earn­ers.

They also saw more take­home pay, she said, and will now be giv­ing some of that money back.

A va­ri­ety of mov­ing parts, of course, come into play when cal­cu­lat­ing your ac­tual tax bill.

Since the old tax rules no longer ap­ply, your tax bill— and your tax re­fund—may not look any­thing close to what it did last year.

Most house­holds will see some tax cuts, thanks to a lower tax rates and a higher stan­dard de­duc­tion, which is nearly dou­ble what was used for 2017 tax re­turns.

Nearly 65 per­cent of tax fil­ers will see a tax cut over­all and pay less for their 2018 in­di­vid­ual in­come taxes than in the past un­der the old rules. The av­er­age tax sav­ings would be about $2,180 for that group, ac­cord­ing to the non­par­ti­san Tax Pol­icy Cen­ter in Wash­ing­ton, D.C.

About 6 per­cent are ex­pected to pay more. The av­er­age tax in­crease would be $2,760.

And 29 per­cent would see no change.

Tackle your tax re­turn as early as you can this year in or­der to claim any larger-than-ex­pected re­fund. And if you owe money, it’s bet­ter to know ear­lier in the game than at the last minute on April 15.

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