By Andrew D, Schwartz, CPA
This year’s most interesting observation actually has more to do with next year’s taxes. The tax software we use comes with a Tax Projection option, and I prepared a 2018 tax projection for many of the clients I met with during the winter to see how their taxes would change under the new rules that took effect on January 1st.
As far as I could tell, the healthcare professionals who are the biggest winners under the new tax rules are high-income married couples with children and with income ranging from $300k to about $500k. Here is why:
1. Child Tax Credit:: Under the prior rules, families were eligible for a tax credit of $1k per child under the age of 17. The problem was that this credit began to phase out once their income exceeded $110k. The new child tax credit is $2k per child under the age of 17 and doesn’t begin to phase out for married couples until $400k of income. Plus, there is a new $500 tax credit for older children and other dependents that also begin to phase out at $400k of income.
2. State Income Taxes and Real Estate Taxes: As everyone is well aware, the deduction for state income taxes and real estate taxes is now capped at a combined total of $10k. Most married couples who own a home or earn a good salary in a state that has an income tax will see their deduction capped. That being said, this deduction was already being limited. For 2017, married couples whose income exceeded $313,800 were seeing this deduction phase out by 3% of the amount their income exceeded that threshold. And then, the dreaded Alternative Minimum Tax (AMT) eliminated any remaining tax benefit. What this means is that the $10k now allowed might actually allow for a higher tax break for high income taxpayers than they were receiving pre-2018.
3. Personal Exemptions: The new tax rules eliminated the $4,050 tax break for yourself, your kids, and your other dependents. This is no problem for high income taxpayers who were already not benefiting from their personal exemptions due to a combination of a similar phase-out threshold to itemized deductions, and then the AMT eliminating any remaining tax break for your personal exemptions.
4. Alternative Minimum Tax (AMT): Looks like the dreaded AMT will affect very few taxpayers going forward. Since married couples earning between $300k and $500k annually seemed to be the ones paying the highest amount of Alternative Minimum Tax each year, it stands to reason that they will benefit the most from changes made to this tax.
5. Lower Tax Rates: A reduction in tax rates will reduce everyone’s taxes. The higher your income, the greater your tax savings.
6. The New Qualified Business Income Deduction: There is a new tax break equal to 20% of your self-employment income plus your share of “pass-through” income from S-Corps and LLCs. This new tax break is fully phased out for healthcare professionals whose taxable income exceeds $415k if married (or $207,500 if single). Married couples with taxable income of less than $315k (or $157.5k for single individuals) will get the full benefit of this new 20% QBI tax break.
Get a Tax Projection:
The only way to determine how the new tax rules will impact you is to work through a tax projection. Now that April 15th has come and gone, your CPA would love to hear from you to help you figure this out. From what I’ve seen, if you are married and earn between $300k and $500k, your federal income taxes will be $10k-$20k lower this year than what you paid for federal income taxes in 2017.
Prior Years Trends and Observations
Here are the most interesting trends that I observed during the prior 6 tax seasons along with links to those articles:
2017: That tax season I noticed that more of my clients installed solar panels on their homes during 2016 than all of the prior years combined.
2016: The number of clients who instructed me to allocate $3 of their tax liability to the Presidential Election Campaign Fund, due primarily to the craziness brought on by the Trump/Clinton Presidential Election.
2015: The year of the energy efficient tax credit with lots of my clients purchasing solar panels, electric cars, and even re-charging stations for those electric cars, including my long-time Dr. Jim who purchased all three.
2014: With a variety of tax hikes taking hold in 2013, the trend that tax season was higher taxes on lower income for high-income taxpayers, with many clients getting stuck paying obscenely high balances due.
2013: This was the first tax season that I noticed a sizable uptick in the number of individuals taking advantage of Health Savings Accounts.
2012: Record low interest rates meant that many homeowners refinanced their home mortgages at least once during 2011, including all but one or two of my clients who had a mortgage