The Republicans’ final tax plan perpetuates economic, educational, and wealth disparities in the United States and the President is committed to signing it. However, the Joint Committee on Taxation and Tax Policy Center found that all income groups will, on average, see a tax cut in 2018 and 2019, with proper planning. Californians did not fare as well as the rest of the nation, since the final plan limits the deductions for income, sales, and property taxes to $10,000 annually and California has the highest income and sales taxes and second highest gas taxes in the nation. This reminds me of a Belizean proverb that says “Don’t call the alligator a big-mouth until you have crossed the river”.
If you itemize deductions, the GOP plan preserves 401(k) rules, the adoption tax credit, and deductions for the graduate school stipend (tax-free tuition waiver), the student loan interest and charitable giving. In addition, the medical expense deduction threshold was lowered to 7.5 percent for 2018 and 2019, but it reverts to 10 percent thereafter. To capitalize on these it would be wise to plan any major medical procedures in 2018 or 2019. You should consider increasing your 2017 charitable deduction, 401(k) IRA deductions, and contributions to your children’s college now. The GOP plan allows mortgage interest deduction on new loans up to $750K. Existing loans remain deductible up to $1 million under current law.
If you are planning to purchase a new home in 2018, consider asking the seller to carry a second “principle-only” loan, and/or increasing your down payment to avoid a home mortgage greater than $750,000. Additionally, be sure to claim the property tax homeowner’s exemption of $7,000 with your local county assessor and examine any additional property tax assessments (school bonds, water district taxes, municipal bonds, etc.) which could increase the cost of your new home and your taxes. Don’t get it twisted, buying a home is still a good investment considering the appreciation and long term savings from rent increases.
The plan eliminates the personal exemptions of $4,050 for each family member, but doubles the standard deduction to $24,000 if married, $18,000 for heads of household, and $12,000 if single. It also expands the child tax credit from $1,000 to $2,000 (of-which $1,400 is refundable) and provides for a temporary $500 credit for each non-child dependent (for example, a child 17 or older, an ailing elderly parent, an adult child with a disability). The plan also expands the use of 529 accounts to reimburse up to $10,000 in educational expenses for students in K-12 private schools or who are homeschooled and preserves the Earned Income Tax Credit of up to $6,318 for qualified individuals earning less than $53,930 (for the 2017 federal tax year). If you qualify for all of the above, you may actually receive a refund, even if you paid zero taxes and are not required to file your tax return.
Grandparents can profit from the annual gift tax exclusion of up to $14,000 by giving their children money to pay for childcare and summer camp, depending on their income, and your children can then claim the childcare deductions. You could also give money to your college graduate to double down on their college loan interest, depending on their income, and then they can deduct the student interest; keeping the money all in the family.
Changes to Obamacare eliminated the mandatory provisions of the Act. The Congressional Budget Office estimated that 13 million people will cancel their Obamacare plans. This will likely cause the premiums to increase significantly for those who remain, including Californians unless the state legislature takes immediate action to subsidize the program. Equally concerning, Congress has yet to reauthorize $2 billion in funding for the Children’s Health Insurance Program (CHIP), which provides health care coverage for 1 million children. The legislature must act immediately to encourage Congress to reauthorize the CHIP. Another devastating aspect of the Plan is that in 2018 it eliminates the deduction for casualty losses – for property lost or damaged by a fire, flood, earthquake, or due to theft – unless the area is declared a federal disaster area. The California legislature should seek federal designation of all calamities in California immediately. Losses resulting from our recent wild fires in 2017 remain deductible.
Wealthy Californians will save millions with some strategic tax planning. Warren Buffett, the second richest man in America, noted in the New York Times that he paid “a lower percentage of his taxable income than any of the other 20 people in his office.” Under the GOP tax plan, Mr. Buffett will pay even less taxes. The plan cuts the tax rate for households making over $600,000 and individuals making over $500,000 from 39.6% to 37%. The plan also cuts the corporate tax rate to 21%, down from 35%; and the Individual Alternative Minimum Tax exemption will be increased to $500K for individuals and $1 million for couples filing jointly, up from the current $54,300 for individuals and $84,500 for couples. In 2018, the plan doubles the amount of the current exemption from Estate Tax from $5.5 million to $11 million for individuals, and from $11 million to $22 million for couples filing jointly, with annual adjustments for inflation.
Individuals with pass-through companies such as S corporations, LLCs, partnerships, or sole proprietorships will be allowed to deduct 20% of their taxable income through 2025 when this provision sunsets. Service businesses such as law firms, doctors’ offices, and investment firms can only take the 20% deduction if they make up to $315,000 (for couples.) In addition, the final bill gets rid of the corporate alternative minimum tax, a big relief to the business community, and allows for a new capital investment deduction for new capital equipment. Accordingly, if you work as an employee for companies such as Uber, you should consider setting yourself up as an independent contractor to take advantage of this huge tax break and waiting until 2018 to purchase any equipment. Doctors and lawyers may want to set up split companies where the assets are owned by a corporation and the partnership pays the salaries. Lastly, the plan changes the current worldwide tax system for multi-national corporations to a territorial tax system, which provides for a significant reduction in taxes on upwards of $3 trillion in foreign profits left abroad to avoid paying U.S. taxes and allows U.S. companies to delay the repatriation for years.
To protect its taxpayers, California must consider tax reform that will stimulate long-term career employment for the 947,000 unemployed and 800,000 individuals living in poverty in California. I would recommend an on-the-job (OTJ) training program that provides job training for the unemployed, lowering the state income tax rate for the poor and middle-income earners to stimulate the economy, doubling the renter’s tax credit to increase affordable living, and providing a deduction for parents who donate time and resources to public schools. To pay for these policies, the legislature could prioritize redirecting the current billions in existing tax credits and loopholes: toll the OTJ credit for one and 1/2 years to allow the state to capitalize on the economic stimuli of the credit; establish government efficiency programs that allow the state to recapture lost federal dollars, such as the $1.4 billion in unclaimed federal Earned Income Tax Credits; collect the upwards of $9 billion in taxes from the black market operators who unfairly compete with California businesses; and establish government efficiency programs to recapture the upwards of $18 billion in accounts receivables (unpaid taxes) at California’s taxing agencies. California leads the way in protecting children of immigrants, rightfully so, and we should do the same to protect Californians from the Republicans’ tax and public policies.
The above tax planning concepts are provided for discussion purposes only, and you should consult with your tax professional to determine how they apply to your specific circumstances.
Board of Equalization Member Jerome Horton has over 37 years of public and tax policy experience, serving as a member of the Inglewood City Council, State Legislature, California Medical Commission, California Cultural Endowment and Workforce Investment Board and as the 1st African American elected to the California State Board of Equalization.