Now that it’s 2018, here’s what you need to know about the new federal tax bill
In Connecticut, where 41 percent of taxpayers file itemized returns, accountants are being flooded with questions about the change to state and local deduction under the new federal tax law.
The law caps the state and local tax, or SALT, deduction at $10,000, which is well below the $19,664 average SALT deduction taken by Connecticut taxpayers. The standard deduction, on the other hand, has been doubled.
“That has a significant impact on the bottom line when it comes to your tax return,” said Bonnie Stewart, executive director of the Connecticut Society of Certified Public Accountants.
It’s been a busy couple of weeks for accountants, who are still sifting through the new law to find out what’s in it while simultaneously fielding questions from clients about how the biggest tax overhaul in 30 years will impact them. The majority of the provisions take effect in 2018, but tax experts are advising their clients to start planning now for next tax season.
“Tax planning is for everybody not just the wealthy” Stewart said. “It makes a huge difference in your behaviors and the amount of taxes you’ll pay in the end.”
Questions about the new cap on the SALT deduction are among the most common that Stewart and other accountants in the state are getting. Several cities and states already are trying to find a way around the new limit. Three New Jersey towns are suggesting that residents donate to a town-run charity to mitigate their property taxes.
“In the Northeast where housing values are higher, this cap on the SALT deduction has a true regional impact,” said U.S. Rep. Joe Courtney, D-2nd District, adding that it will be a factor for those looking to sell their house.
Though he said for some itemizers, because of the doubling of the standard deduction and other provisions, the new cap could be a wash.
Courtney, who held a forum on the new tax law in Waterford on Saturday, said his office has received about 5,000 letters, emails and calls from constituents since President Donald Trump signed the measure on Dec. 22.
The new law makes a number of changes that affect homebuyers. It reduces the amount of mortgage interest that can be deducted from $1 million to $750,000.
“One of the things that made homes affordable was the interest deduction. Can you still afford that home without the interest deduction? Those are the kind of decisions that are going to need to be made,” Stewart said.
Under the new plan, filers no longer can deduct interest payments on a home equity loan.
The tax code, as it stands now, allows a person to deduct up to $100,000 on a home equity loan.
“For a lot of families who want to pay for college and take a loan out, that’s been a way to soften the blow, to use home equity to deduct the interest payments,” Courtney said.
The combination of the cap on the SALT deduction, the changes to home equity loan deductions and lowering the deductibility on mortgage interest provided about $600 billion to $700 billion that the bill writers used to pay for other parts of the bill, he said.
Corporations retain many of the deductions that middle-class families largely are losing, according to Courtney. Whereas the cut to the corporate tax rate from 35 percent to 21 percent is permanent, the tax reductions for individuals stop in 2025.
“This was not a tax bill that has permanent, uniform contours to it. Some groups got the permanence but individual rates did not, so there really was a delta between how individuals were treated in this tax bill versus corporations,” Courtney said.
Brian Newman, partner in charge of tax for New England for CohnReznick LLP, said the impacts of the new bill on corporations already are being seen, with businesses giving employees bonuses and announcing large infrastructure investments.
Newman has received a lot of questions from business owners about the tax cut for so-called pass-through entities, or small businesses whose profits are passed directly to the owners and are taxed at the owners’ individual rates.
“There’s a lot of nuances to how that works and the rules surrounding who qualifies and who doesn’t qualify,” he said.
He’s also been asked a lot about the limitation on business interest expenses and how those provisions work.
In addition to finding out what’s in the new law, which was passed in 50 days without any public hearings, accountants will have to figure out how certain provisions are going to be interpreted. That already happened to an extent with people rushing to pre-pay their property taxes for 2018, and the Internal Revenue Service subsequently putting out a notice that that would only work under limited circumstances.
As for the whirlwind last couple of weeks, Newman, who’s worked as an accountant for 30 years, said, “That’s part of our business. Our business is like that anyways.”