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The Cocktail Napkin Version of the Tax Cuts and Jobs Act

The Cocktail Napkin Version of the Tax Cuts and Jobs Act

| October 08, 2018

Perhaps the most frequent conversations we have had with our clients this year concerns the 2017 Tax Cuts and Jobs Act (you know, the "big, beautiful tax cut") signed into law on December 22, 2017 and clarified a few times by the US Treasury, most recently in August. While you may be leery of asking your tax advisor to run a current year projection and compare it to last year, it is imperative you do so while there is still time in the calendar year to implement tax-reduction strategies.

If you haven't discussed this with your tax professional yet, let me give you a simplistic but useful cocktail-napkin illustration of where your starting point may be:

  • Take out the federal (Form 1040) tax return you filed most recently (likely 2017). Turn to Schedule A, Itemized Deductions. Look for the second box, "Taxes You Paid," for state income taxes (line 5) and personal property taxes (line 7), then check the total on line 9. This year, that amount—taxes you already paid for state income and property--cannot be fully deducted because the deduction is capped at $10,000.
  • Now turn to Form 6251, Alternative Minimum Tax—Individuals. See line 35? If you had a payment you made in the past, this time you may get to keep that money. The AMT exemption and phase-out limits have been increased to much higher levels--$500,000 for single filers, $1 million for married filers—and the AMT has been eliminated for corporations.
  • So, if your state and property taxes paid last time exceed the $10,000 cap, take the amount of differential and subtract the AMT tax you had previously paid. This will give you a sense of any tax problems to address.

Again, that is not your tax bill; but it should motivate you to speak with your tax professional about the other features of the Tax Cuts and Jobs Act. For example, there's a larger standard deduction for 2018 filers (now $12,000 for single filers and $24,000 for joint filers); some itemized deductions have gone bye-bye; alimony payments will not be deductible for divorce agreements executed after December 31, 2018; and if you're a business owner, you may have options in certain qualified retirement plans to reduce your tax burden by adjusting your gross income below $157,500 (single) or $315,000 (married) to reach the Qualified Business Income (QBI) threshold.

Sure, the 2017 Tax Cuts and Jobs Act won’t be the size of a postcard and can't be fully calculated on a cocktail napkin. Simply use the Schedule A/AMT formula (line 9 -$10,000 – AMT) in conjunction with advice from your tax advisor and financial planner, to understand the potential tax consequences and possible tax-saving opportunities well before December.