New Tax Law for 2018 – Considerations

There are a few things that I think are worth mentioning with regard to the new tax law that passed Congress in December 2017.

  • Surprises! There will be many, and I’m not looking forward to it. I’m going to have clients who owe a lot more than they’re expecting, or a lot less, or are receiving much smaller refunds than they’re expecting, or larger refunds, etc. While this is of course true every year, it’s going to be more true for 2018.
  • On average, most people will pay less federal tax for 2018 than they did in 2017. But because the W-4 payroll withholding formulas changed, it’s entirely possible you’ll have to pay more federal tax at tax time than you have in previous years, even if your overall tax total is lower. It all depends on whether and how much you haven’t yet paid in as a result of decreased withholding rates.
  • Continuing that thought: if you’ve typically itemized deductions in the past, then you’re more likely to be under-withheld. The explanation for this is complicated, but it has to do with the interaction between: 1) the fact that federal withholding rates (W-4) are based on nationwide averages; and 2) Oregon residents (and many blue-state residents in general) who typically itemize deductions will see a lower tax rate reduction than the national average. If your federal withholding rate drops more than your federal tax rate, then it’s more likely you’ll end up under-withheld.
  • Your state tax will likely be a bit higher than last year’s, all else equal, since there’s no “kicker” credit this year.
  • The “qualified business income” (QBI) deduction is a real doozy, and the law remains unclear on several aspects related to calculating and claiming this deduction. Any return showing net income from self-employment or rental activity will require additional work. In some cases, significant additional work.
  • Fewer people will be claiming itemized deductions on their federal return, but nothing’s changed at the state level. So for many people, instead of preparing the Schedule A as part of the federal return, it’ll now be part of the state return.
  • There’s at least one significant change to the Schedule A that will affect some of my clients: if at any time (past, present, or future) you borrowed against your home equity (including HELOC’s, home equity loans, and cash-out refinances) and used any of the funds for purposes other than home improvements, then a portion of the interest is now non-deductible. Calculating that non-deductible portion is going to be a real headache in some cases!
  • A few deductions have been eliminated entirely, which will simplify things for some of my clients. In particular, there is no longer any deduction for moving expenses, un-reimbursed employee expenses (including home offices), or investment fees.