With passage of the Tax Cuts and Jobs Act, there will be substantial changes in tax payments for many Americans in 2018. A common question is, "What will the impact be on me?"
The nonpartisan Urban-Brookings Tax Policy Center has published seven examples for married couples and single persons. These examples are helpful in understanding how the substantial tax changes will affect individual taxpayers.
- Married Couple, Children Ages 10 and 12 - This married couple with $75,000 of family income in 2017 receives personal exemptions, takes the standard deduction and calculates the tax. The couple receives $2,000 in child tax credits and pays tax of $3,858 in 2017. In 2018, the same couple loses the personal exemption, but the standard deduction almost doubles to $24,000. They also have $4,000 in child tax credits. Their tax is reduced by $2,119 to a total of $1,739.
- Married Couple in High-Tax State - A married couple with adjusted gross income of $135,000 in 2017 will receive personal exemptions and be able to deduct their state and local taxes. Their tax is $15,508. In 2018, the same couple takes the $24,000 standard deduction rather than the itemized deduction and their tax is $16,299. Their tax has increased $792.
- Married Couple in Low-Tax State - The same couple with income of $135,000 lives in a low-tax state and has itemized deductions of $24,300 in 2017. Their tax bill is $16, 908. In 2018, the couple takes the $24,000 standard deduction and has tax of $16,299. The 2018 tax is $609 lower.
- Married Couple with No Children - This married couple with moderate income of $30,000 and no children takes the standard deduction in 2017. Their tax is $870. In 2018, they lose their personal exemptions but the standard deduction is nearly doubled to $24,000. Their tax of $600 is $270 lower.
- Single High-Earner with Wage Income - A single person with a substantial income of $250,000 will have itemized deductions in both years. The itemized deductions in 2017 are $46,000 and there is alternative minimum tax of $3,345. The total tax is $52,366. In 2018, the single person has itemized deductions of $30,500, has no alternative minimum tax and the total tax is $52,515. This tax is $149 higher.
- Single High-Earner who is Self-Employed - If the single person with income of $250,000 is self-employed, he or she could qualify in 2018 for a 20% reduction in tax rate. The 2017 individual with self-employed income again has $52,366 in tax. Because the 2018 individual with self-employment income receives the 20% lower tax rate, his or her taxes are reduced by $14,485 to $37,882.
- Lower-Income Single Taxpayer - A single person with moderate income of $30,000 in 2017 benefits from a personal exemption and standard deduction. The tax is $2,426. In 2018, the single person loses the personal exemption but the standard deduction almost doubles. The tax is reduced by $457 to $1,970.
These seven examples may vary considerably depending upon the specific circumstances of each taxpayer. However, they do provide reasonable estimates of the probable impact of the Tax Cuts and Jobs Act on Americans.
IRS Permits Some 2017 Property Tax Deductions
In IR-2017-210, the IRS explained how some homeowners who paid property taxes in December of 2017 may qualify for an itemized deduction.
After the Tax Cuts and Jobs Act was enacted on December 22, 2017, many homeowners rushed down to county offices to pay their property tax. Because deductions for state and local taxes (SALT) in 2018 are limited to $10,000, these homeowners will not be able to deduct all of their state and local taxes in future years.
In response to a blizzard of questions from taxpayers, the IRS explained how to qualify for a deduction.
The basic rule is, "A taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depending on whether the taxpayer makes the payment in 2017 and their real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017."
Harry Homeowner's county assesses property on July 1, 2017 for the period from that date June 30, 2018. The first installment is due September 30 and the second on January 31, 2018. Harry may pay the January 31, 2018 bill in December of 2017 and qualify for an itemized deduction on his 2017 tax return.
Harry Homeowner's county allows taxpayers to prepay the assessment for July 1, 2018 to June 30, 2019. This is a tax for year 2018 and a prepayment in December 2017 is not deductible.
Gross Overvaluation of Conservation Easement
In Roth, John L. et ux. v. Commissioner;
No. 5544-12; TC. Memo. 2017-248 (28 Dec 2017), the Tax Court accepted a stipulated value for a conservation easement donation. Because the claimed value was $970,000 and the stipulated value was $30,000, the Sec. 6662(h) 40% penalty was applicable.
In 2007, taxpayers John and Deanne Roth deeded a conservation easement on 40 acres in Prowers County, Colorado to a qualified nonprofit. They reported a $970,000 charitable deduction during tax years 2007 and 2008.
The IRS audited and claimed the conservation easement value was zero. The Service assessed a Sec. 6662(a) 20% accuracy penalty and a 40% gross valuation misstatement penalty.
The party stipulated the conservation easement value was $30,000. The Tax Court noted that the Sec. 6662(a) 20% penalty is applicable if the claimed value was 150% or more of the correct amount. However, there is a Sec. 6664(c) exception to the penalty if the taxpayer can show reasonable cause. The Roths qualified for this exception.
The taxpayer claimed the IRS had not followed the correct procedures to have a supervising officer sign the penalty as required under Sec. 6751(b). The Tax Court noted the IRS may assert penalties in answers to pleadings. With a claimed value of $970,000 and $30,000 in stipulated amount, the 40% gross overvaluation penalty was applicable.
Applicable Federal Rate of 2.6% for January -- Rev. Rul. 2018-1; 2018-2 IRB 1 (17 Dec 2017)
The IRS has announced the Applicable Federal Rate (AFR) for January of 2018. The AFR under Section 7520 for the month of January will be 2.6%. The rates for December of 2.6% or November of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return.