How GOP Tax Bill Impact San Francisco Bay Area Tax Planning
By Ying McKee- San Francisco Tax advisor
The Tax Cuts and Jobs Act of 2017, also called Republican Tax bill 2017, have been signed into law several days before Christmas.I have been scanning the thousand-page measure over and over, exchanging emails and phone calls with fellow CPAs in San Franciso bay area in the effort to fully grasp the bill’s vast changes. There are also many questions from clients; many of which live in San Francisco bay area. Many provisions of the bills affect San Francisco Bay area. It is a high property tax, high real estate tax area. There are full of middle-class dual-income families, and there are also many business owners. I have been asked over and over lately “ How this will affect me?” “ Should I incorporate?” “Should I prepay taxes?” Am I going to pay more taxes?”
The provisions are broad and general. The Department of Treasury and the Internal Revenue Services have not written new regulations to implement the new laws yet, and I am also confident there will be technical corrections on the bill. The impact of the changes for taxpayers will have to be determined on a case by case basis. We are still unsure how IRS is going to deal with so-called "new loopholes" However, I want to highlight some of the critical changes that will impact many of my clients in San Francisco bay area and beyond. Please note this IS NOT a complete list of the Tax reform bill.
Many of the changes that impact individuals are temporary until 2025. Brackets are adjusted for inflation each year. Meanwhile, almost all of the corporate and business cuts are permanent.
Overall individual tax rates under the bill are lower than before. Maximum income tax rate will drop from 39.6% to 37% Being a geek as I am, I did some interesting calculations. Using a family of 4 with dual income, owning a 1M dollar house, with 10K property tax and 25K mortgage interest expenses a year in California, a family with a combined annual income of 200K, 300K, 400K, and 600K, all will see decreased tax bill in 2018. However, as the tax reform intended, the rates are going back up gradually, so the drop is only temporary. It is reported 28% of Californian will see a tax increase in 5-8 years.
Personal exemption repealed while standard deduction increased to 24K (MFJ). Many lower to medium income families do not need to file itemized deductions anymore. Expect to see less HR block or Liberty tax stores. For higher income earners and many small businesses, the bill has created many uncertainties and loopholes. Many provisions in the bills are only temporary and will be reversed later. Tax planning is more critical than ever.
Mortgage interest deduction is limited to $750K of acquisition indebtedness starting with the new loans from 2018. Home equity line interest deduction not allowed anymore. San Francisco's median home price is around $1.5 million, San Jose's median home price is around $1 million. ($200,000 nationwide) it affects almost every household here.
State, local and property taxes deduction are limited to 10K. Prepaid 2018 state income taxes will not be able to be deducted on 2017 tax return. No mention of prepaying property taxes. However, you will not have any tax benefit of prepaying if you are going to be in AMT.(This is why you need to call your CPA right now)
According to Internal Revenue Service data, early 50% Bay Area taxpayers take advantage of the state and local tax deduction(SALT). In San Francisco County, avenge SALT deduction taken are $35,000, San Mateo County, $39,000. Losing those deductions have a massive impact on families and how they structure their lives. Bay area will be even less affordable. It is also going to be more difficult to recruit highly skilled out of state employees to move here.
Limiting the property tax and mortgage interest deduction significantly decreased the tax benefits of homeownership. The Bay Area could see a drop in the housing market and a growing percentage of renters.
Miscellanies itemized deduction repealed. It will hurt employees who incurred unreimbursed business expenses. In San Francisco Bay area, many high tech employees or outside sales employees work from home for the benefit of the employers. The unreimbursed costs will no longer be deductible. The GOP tax bill also eliminated some of the employee transportation benefits. I would suggest that you renegotiate soon as possible your compensation package for 2018 to compensate for the loss of the tax benefit.
Child credit increased to 2K per child and phase out threshold increase to $400K. Many bay area families will be able to claim the credits now the phase-out threshold increased significantly.
Alimony deduction (inclusion in income) is repealed after 2018. The wealthy spouse might want to accelerate the divorce, and the alimony recipient should wait until 2018! The other thought: Think twice before divorce now since it just gets more expensive for the rich one.
22 Million is the new estate tax exclusion in 2018. Hang in there for your kids until you hear the new year’s bell. Alternatively, Die before Democrats get back in the office.
AMT individual: Increased exemption amount to $109,400 and exemption phase-out to 1M. It means more people will get spared by the AMT tax burden and fewer people will be subject to the AMT. It is welcome news for many of the bay area taxpayers who fall into this trap( generally mid-income taxpayers with a house and mortgage) Less people needs to file Form 6251.
Affordable Care Act: No more penalty after 2018. However, 2017, you still are subject to penalty if you do not have insurance.
Flat rate of 21% for corporate taxes. Big win for large business. Personal service corporations will not be eligible for this reduced tax rate. Small business gets hurt since the bill got rid of the low 15% tax rate. If your C Corporation taxable income is below 90K, you will pay more tax under the bill.
Corporate AMT tax: No more. pleasing Silicon Valley tech companies
Bonus depreciation, section179 expensing: More generous than before.
Luxury automobile depreciation limits: Increased yearly cap significantly. $10K first year, $16K second year, $9,600 third year and $5760 later years. It is good news for many business owners.
1031 Exchange: Limited only to exchange of real property that’s not primarily held for sale. Trade in autos no longer defer taxes.
Section 199 Domestic production activity deduction: Repealed. 9% deduction will be lost for many constructions and manufacture business.
Entertainment expenses: More strict on deduction allowed.
Meals: Previously allowed deduction for providing food and beverages to employees through an eating facility that's for the convenience of the employer now subject to 50% limitation until 2025, when will be nondeductible.
Pass-through income deduction: For tax years 2018 to 2026, individuals will be allowed to deduct 20% of “qualified business income” from pass-through business such as a partnership, S corporation, or sole proprietorship, etc. No deduction for Accounting, health, law, consulting, athletics, financial services, brokerage services or other personal service industries (so-called “specified service trades or businesses” ) if taxable income of those taxpayers over 315K(MFJ). The W-2 limitation is imposed for business over a certain threshold. However, last minute-added perk for real estate investors allow heavily capitalized business deduction. Out of the whole tax reform bill; the pass-through income deduction is one of the most complex parts. We are not sure how IRS will implement this. Personally, I think it's too soon to make any decision as to change business structure due to the new bill. Careful consideration and review by your CPA or tax advisor are needed before taking any actions.
529 Plan: Up to $10,000 of 529 savings plans can be used per student for elementary or secondary education instead of college.
Call Ying, your trusted Virtual CPA if you have further questions.
If you want to read the full text of the bill, you can find it here
Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.