See how to upload tax source documents and access your tax return in Onvio via short video...
Onvio "how to" videosWhen Tax Laws Change
While Congress attempts to make major changes to the tax code, should any of us be concerned? If you have read articles outlining proposed tax law changes, you probably realize that many of us will owe less taxes in 2018 and some of us will owe more.
Of concern to those of us in high tax states, like New York, are the itemized deductions (when they exceed the standard deduction) that we take against our income in arriving at taxable income. State income taxes, mortgage interest and real estate taxes paid are on the chopping block. While standard deductions will nearly double, be aware that the personal exemptions are being eliminated. The higher standard deduction won’t make up for that loss for taxpayers with dependents. On the other hand, Congress will increase the child tax credit by $600, which ends when the child turns age 17. This will hurt parents who usually claim their children as dependents through college. Personal income tax rates, on the other hand, will decrease.
Let’s look at an example of a married couple in Upstate New York with a combined income of $100,000. They have two young children and bought a moderately priced home a few years ago. Under the old tax law, they would itemize their deductions for a total of $18,000 and claim personal exemptions of $16,200. Federal income tax would be assessed for this couple at $9,000. They would have $2,000 of child tax credit to apply against this liability and end up with a net tax liability of approximately $7,000.
Under the current House of Representatives’s version of tax reform, this same couple would have a standard deduction of $24,000 instead of itemizing their deductions. Federal income tax would be $9,100 with $3,200 of child tax credit to apply against it resulting in a $5,900 net tax liability, a tax savings of $1,100. If both dependent children are beyond age 16 in the above example, then without the personal exemption, the tax liability under the House’s proposed tax law would be roughly the same as it is now under the old tax law. The Senate’s version of tax reform currently does not include any deductions for state income taxes, mortgage interest or real estate taxes. That will hurt many people in New York State with higher incomes, costly home mortgages and high property taxes, most of whom live in downstate.
If Congress is able to pass tax reform soon, the changes will be effective for the year ahead in 2018 and will not impact tax returns for the current 2017 tax year. There are some tax planning opportunities, however, due to lower tax rates in 2018. Tax professionals will likely advise their clients to make purchases now for their businesses before the end of this year, rather than waiting until 2018, and to consider increasing some itemized deductions for 2017. A deduction under the 2017 higher tax rates is more valuable in saved taxes than the same deduction for 2018 when tax rates decrease.
There are many pieces to tax reform that are not covered here that may have some impact on you. Everything is still subject to change. For New York income taxes, assume they will stay the same for now. The U.S. Senate still has to pass their version of tax reform and then a Congressional conference committee of both the House and Senate will iron out the differences. Check with your tax advisor when you get your 2017 tax return prepared for an estimate of how the new tax changes, if passed, will affect you for the 2018 tax year.