For my clients residing in States with high State Income Taxes and/or high personal residential property taxes, the valued and yearly deduction of these taxes on your Itemized Deductions beginning in 2018 has had the unlimited ceiling crashing down to a total of $10,000 per year.
What does this mean?
For 2018, all of your usual deductible itemized tax deductions are radically diminished in their treasured reduction of your overall U.S. Income Tax Liability.
If you look at your form 1040, Schedule A for 2017 and calculate your total taxes paid, including but not limited to:
- State Income Paid in 2017, State Income Taxes Withheld from your Wages and Pensions,
- Your State Estimated Taxes Paid for 2017 and/or 2018,
- Your 2016 State Income Taxes Paid in 2017
- Your Residential Property Taxes Paid in 2017
- State Sales Taxes Paid on large purchases in 2017
- Personal Property Taxes Paid on your Automobile
- General State Sales Taxes Calculated Based on Income for 2017
If your total amount is over $10,000, you can estimate how much of these traditional Itemized Deductions you will be without for calculating your Itemized Deductions for 2018!
Prior to 2018, the general feeling among my clients was that “yes, we live in a State with high Income and Property taxes, but we recover from these high State Taxes by deducting them on our Federal Tax Return and get some money back”. Now, this perceived benefit will not be allowed from 2018 forward.
If that isn’t bad enough, not only will you probably be paying more taxes for 2018 but you will also need to be PAYING MORE on your last Federal Estimated Tax Voucher to stop both the:
- Underpayment of Estimated Taxes for 2018 Penalty and
- Late PaymentPenalty since an extension of time to file your taxes does not extend the date for paying your 2018 taxes beyond April 15, 2019
Time is truly running out for your Tax Professional to calculate your estimated US Taxes to allow you to complete items 1 & 2 immediately above. Normally, “End OF THE YEAR” Tax planning is complete by now and many Tax Professionals have wrapped up for the year, my plan is to keep quite busy with estimating clients’ 2018 taxes and help the clients make payments now for 2018. The END OF THE YEAR is truly far from over!
I find that mid to high-income clients; families, Hi Tech Employees, Professionals and even clients with pensions will be dramatically affected. Types of actions still left to you are, but not exclusive:
- Wage Earners can still have additional Federal Taxes withheld from their paycheck for the remainder of December 2018!
- Pension Income and Social Security Benefits can still have additional Federal Taxes withheld for payments in December 2018.
- 4th Voucher of the Federal Form 1040ES can be mailed with a payment to top up your 2018 taxes paid up to January 15, 2019, yes that’s right January 15 2019!
This Part I is not the only bad news, the Itemized Deduction for Unreimbursed Expenses is no longer allowed at all for years beginning with 2018. If you have valid Unreimbursed Work Related Expenses such as Dues, Travel Expenses, Meals and Entertainment, Special Clothing and Tools as well as fees associated with Investments; these are NO LONGER DEDUCTIBLE as an Itemized Deduction.
WHAT TO DO?
- STATE INCOME TAXES
You can potentially reduce your State Income Taxes by relocating to a non-tax State, although a bit dramatic…but worth a look. Many High Tech companies are relocating from California to Texas and other States that offer tax incentives.
For California Residents the State Income Tax Rate can easily be over 13% and then combine that with the highest Federal Tax Rate beginning in 2018 of 37%, now you over 50% tax rate for the high income tax bracket, OUCH! If you do plan on leaving California, be extremely careful, it is not as easy as many tax writers passively mention with some rule about 183 days. California has a very long memory and California will remember each time you enter the State, how long were you in California and what was your purpose. California also has a very long long long arm quite capable of reaching across State boundary lines to extract tax from you if they find you are still a resident of California or never gave up your complex California domiciliary. New York is also very aggressive in matters of New York associated income and residency.
If you are seriously considering a move, there are several States that have no individual income taxes:
- Wyoming, and
- South Dakota
Also, if you work in Washington, D.C. and a non-resident there, then no individual income tax will be assessed.
You can also reduce your State Income Tax by investing in bonds that are exempt from your State’s income Tax. Many bonds now are also exempt from BOTH Federal and State Income Tax, check these out with your Investment Advisor. You may also want to invest in companies that have excellent growth but a policy of paying out no dividends but uses the profits to reinvest in their company for higher and faster grow thin the value of your funds…lets talk about this also!
2. STATE SALES TAX
If you are considering the purchase of an expensive car, you may want to buy a less expensive car or a used car or even arrange for your employer to provide you with a car. Employer provided cars will add to your taxable income, but it will be far less expensive than actually paying the sales tax that you will not be able to deduct!
3. STATE PROPERTY TAX
For many families and higher income clients, whether active, i.e.…wages or passive, dividends, income and capital gain income; your property taxes in California are going to be high and they are not expected to be going down…only up from year to year. Generally, property taxes are the main source of revenue for California counties to fund schools. However, when Californians are finally able to purchase a home most of their children have grown and moved out of the county or out of the state. Therefore, there is no longer a direct advantage for a property homeowner to own while paying high property taxes that do not directly benefit them. I would say that most parents live in rented property and pay no real estate taxes. Now it could be argued that the homeowner can pass on the increased property tax to the renter as annual increased rent, but many cities and counties in California have a strong and active “Rent Control Board” that does not allow this rental increase to be tied dollar-for-dollar to increased property tax. Once solution I have found is the use of a firm in California that will appeal your particular property tax increase for NO FEE if they can not reduce your property tax bill and they are very effective for my clients on a yearly basis!
- UNREIMBURSED EMPLOYEE BUSINESS EXPENSE
The basic thought I have on this matter is to have the Employer pay these expenses as part of its SOON TO BE revised Employee Handbook, which Employers are required to have for the Employee. If you own part of a business, such as an LLC, S Corporation or C Corporation, hold a Special Meeting of the owners and amend your By-Laws to reflect this new company policy. CAUTION, it may be too late to adopt this new policy for 2018…lets talk about this.
- INVESTMENT FEES
Many professional sand retirees provide me with their portfolio statements for the end of the year and I am always amazed at how little was done for them by the Investment advisor by the showing of small dividends, interest, capital gains and just the overall growth of the client’s investment balance from the beginning of the year to the end of the year. My belief is that firms that charge you an investment fee based on the value of your account will not be nearly as motivated as an investment firm that is compensated by performance and growth. Compensation by performance and growth is a win-win, the investment advisor get paid based on increasing your account balance and your account grows more rapidly which shortens the time for your actual retirement…wasn’t that the original plan anyway?
You may want to search for discount brokerages or invest in general index funds that charge you no fees at all!
Time is running out on many of the above items and it may be time to change many of the items to your benefit for 2019. My suggestion is to just give me a call or email me with your concern and telephone number. I love talking and working with my clients, just get yourself a hot cup of coffee or tea, call me and lets discuss what can be done to help as soon as possible….after we are here for our clients financial and tax well-being.
Michael B. Nelson, Lawyer