Tax Reform: The Devil’s in the Details
Over the years, one of my “beats” has been an occasional publication called the Legislative Defense Alert. The idea was to warn readers of legislation that might threaten their wealth, so they could prepare.
There was only one problem: After the 2010 midterm elections, nothing ever happened on Capitol Hill.
There was plenty of light, of course, since Republicans controlled the Capitol and a Democrat occupied the White House.
But no legislative heat … just gridlock. Nothing to write about.
Even with GOP control of Washington in 2017, there weren’t any major legislative changes — until the biggest revision of the U.S. tax code since 1986, passed at the end of December.
The Tax Cuts and Jobs Act was written in secret and subject to no formal debate. Most legislators voted on it without having read it. Consequently, many of the details are only now becoming clear.
When it comes to warnings, however, better late than never … especially when your money is involved.
One Hand Giveth, Another Taketh Away
There’s been plenty of good news about the recent tax changes … but there’s a lot of hidden bad news too.
Besides temporary reductions to personal tax rates and a huge slash at corporate rates, the new tax rules also doubled the standard deduction, to $24,000.
But legislators had to pay for all this somehow — or at least, appear to try.
One casualty that affects everyone is the personal exemption. Until 2017, every taxpayer could reduce their taxable income by $4,050 per person in their household. Not any more.
Another change with widespread impact is home equity loan interest. Unlike mortgages over $750,000, there’s no grandfathering provision, so if you have a home equity line of credit (HELOC), your taxes just went up.
You can’t deduct moving expenses, either, even if they result from a job change. And you can say buh-bye to deductible casualty and theft losses, unless they’re due to a presidential disaster area declaration.
To add insult to injury, tax preparation fees are nondeductible from 2018 onward.
Boss, Can We Talk about Deductions?
But the biggest sleeper in the new tax regime is the elimination of almost all “miscellaneous deductions.”
Believe me, you’ll thank me for alerting you to this little morsel now, at the beginning of the year, when there’s still time to do something about it.
Before this year, you could deduct all sorts of things from your tax liability. Some were limited to an amount exceeding 2% of your adjusted gross income (AGI), but others were unlimited.
They’re all gone. Here’s what you just lost.
Unreimbursed Employee Expenses
It’s not just business owners who have to spend money to make money. Many employees are in the same boat.
For example, since I work remotely, I have always claimed a deduction for the use of my home office, depreciation on my computers and other work-related expenses. That’s a consequential sum.
Starting on January 1, I can’t do that, and neither can you. Either you get your boss to pay you for them, or you eat those costs. (Even if you don’t work remotely, you’re still affected, since employer reimbursement for parking and transit costs are no longer deductible for bosses or employees.)
It’s not just office costs, either. The following are now your personal responsibility:
- Work-related travel, transportation, meal and entertainment expenses.
- Work tools and supplies.
- Job-related legal fees.
- Passports and visa fees for work travel.
- Business liability and malpractice insurance premiums.
- Dues to professional societies or chambers of commerce.
- Work-related education costs.
- Subscriptions to professional journals.
- Union dues and expenses.
- Required work uniforms.
Other Miscellaneous Deductions
Plenty of non-work-related deductions are gone, too. They include:
- Losses on IRAs, both traditional and Roth.
- Trustee fees for your IRA.
- Investment expenses, including charges on dividend reinvestment plans.
- Fees for paying your taxes with a credit or debit card.
- Loss on deposits in an insolvent or bankrupt financial institution.
- Mortgage and other appraisal fees.
- Costs to collect interest and dividends.
- Income-producing hobby expenses.
- Legal fees related to producing taxable income.
- Repayments of Social Security benefits.
- Safe deposit box rental.
You Have Been Warned
With this information, you can adapt.
Millions of Americans will no doubt be having a little chat with the human resources department in the coming weeks about all those little expenses that Uncle Sam has been subsidizing on their behalf.
And if you’re wondering why certain companies like Wal-Mart, Home Depot, AT&T, Comcast, JetBlue and Southwest Airlines were quick to grant bonuses after their corporate taxes were cut, I have one word for you: uniforms.
Pressure from clients shorn of tax deductions for investment costs will result in pricing changes in the financial industry this year. And deductibility of IRA losses may have unpredictable consequences.
But there is one surefire way to claw back all of those lost work-related deductions: become self-employed.
That won’t solve problems with investment fees and other lost personal deductions.
But every single one of those lost job-expense deductions is still available to self-employed people and owners of pass-through businesses.
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Editor, The Bauman Letter
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