The well-publicized $10,000 cap on property tax plus state and local taxes, likewise effective for 2018 through 2025, is causing some folks to plan anew. CPA Al Zdenek, the chief executive officer of Traust Sollus Wealth Management in Manhattan, says, “Here in the New York metro area, some clients whose deductions for these taxes are now severely limited are considering accelerating plans to move to Florida, which doesn’t have a state income tax. Californians might accelerate a move to Nevada for the same reason.”
Anyone mulling a residence purchase needs to know that only the interest on $750,000 of new home-acquisition debt is deductible through 2025. “Financing the purchase of a home needs to be discussed with clients,” Zdenek says.
All the miscellaneous itemized deductions subject to the 2% of adjusted gross income floor have been terminated through 2025. This includes unreimbursed employee business expenses, tax-preparation costs and—yikes!—investment-management fees. Regarding the latter, some clients are “questioning why they’re spending tens of thousands on investment-management fees if the fees are no longer deductible. They’re wondering whether they should just go to a Vanguard,” says CPA/PFS John R. Lieberman, managing director at Perelson Weiner LLP in Manhattan.
Also nixed for the eight-year period are itemized deductions for personal casualty losses (unless attributable to a federally declared disaster) and interest on home-equity debt, along with personal exemptions and the above-the-line deduction for moving expenses.
Another new rule of note: For divorce or separation instruments executed after December 31, 2018, alimony payments won’t be deductible and alimony received won’t be taxed.
Changes For Businesses
For 2018, the maximum deduction under Section 179 for business-property purchases rises to $1 million and doesn’t begin phasing out until more than $2.5 million of equipment has been bought. In addition, the deduction is now available for the following improvements to nonresidential buildings: heating, ventilation and air conditioning, a roof, security systems and fire protection and alarm systems.
Yet even bigger news for businesses is the free fall in tax rates. C corporations pay 21% starting this year, a change not scheduled to expire.
Meanwhile, the profits of pass-through businesses (S corporations, limited liability companies, partnerships and sole proprietorships), which are taxed to the owners, could be subject to a maximum marginal rate of 29.6%, down from 39.6%, courtesy of a new deduction for up to 20% of the business’s profits. This deduction is only available through 2025, but in the meantime Kaufman Rossin’s Anzivino expects it will slash one of his client’s taxes by $250,000 annually.
However, there are hoops to jump through to deduct the full 20%. Limitations phase in when the client’s taxable income is above $315,000 for joint filers ($157,500 for single filers), according to Keebler. In the worst case, when the owner’s taxable income reaches $415,000 for couples ($207,500 for single taxpayers), no deduction is allowed for income from specified service businesses, a category that includes investment management along with law, accounting, consulting and medicine but not engineering or architecture.