Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast that challenges your old school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.
President Donald Trump signed a tax cuts and job act late last year. Since then, many of us in public accounting have been scrambling to learn what many of the specific provisions outlined in the legislation mean for individuals and businesses alike. Explaining this legislation isn’t easy since we are still awaiting formal guidance from the IRS on a lot of these matters. Well we still can provide you with a pretty solid overview of the legislation and our expectations of what’s to come in the coming year. Today’s episode of Unsuitable is dedicated to the individual provisions of President Trump’s tax reform initiative but we’re not going to stop there, be sure to join us over the next several weeks after we dive deeper into this sweeping legislation and what it means to business owners.
Cindy Kula, a regional tax expert and financial planner in Rea’s Cleveland Ohio office is here to talk about the many ways tax reform will impact individuals when they go to file and plan for their 2018 tax return. We’re going to talk about the changes coming to individual tax brackets, standard deductions, itemized deductions, personal exemptions, the alternative minimum tax and much more. Needless to say, we have a lot of questions and I’m looking forward to gaining some much needed clarity on this matter. Welcome to unsuitable, Cindy.
Cindy Kula: Thanks Dave.
Dave: We got a lot to talk about. First of all I want to, we first met about a month ago, I heard you speak at a conference on financial planning and was very impressed with your overall knowledge of financial planning and tax matters. That’s why you’re here today.
Cindy: Thanks Dave. I always look forward to speaking at the Mega Tax Conference. It’s always rewarding to hear other professionals and their input because we can all learn from each other.
Dave: Over very few months, since Walthall and Rea joined forces, you have become very famous across the firm so congratulations on that hard work.
Cindy: Thank you. I didn’t realize I was famous much.
Dave: One of the things that you had mentioned when I heard you speak at the conference is that you treat your clients like they’re friends and family and that really resonated with me. I guess that’s maybe where we start off with this new tax act. Over the last few months, as you’ve been talking to your clients and friends, what are you hearing out there? What are you hearing on the street?
Cindy: It’s interesting you ask because it was the last week of the year and I must have gotten family just calling me. What do I do with my real estate taxes? Do I pay them? Do I not pay them? And there was really no definitive answer but there was nothing to lose. We encouraged everyone to pay their taxes even if there was an exposure for alternative minimum tax we thought that that was the best solution because of the limitation being placed on them in 2018.
Dave: Don’t you just hate giving tax advice to family members? And they never pay you very well, do they?
Cindy: No, but they say thank you.
Dave: As you’ve studied the tax act, in your opinion, do you think this is tax reform or is this tax simplification?
Cindy: Good question. Tax reform. It’s definitely not tax simplification because what they’ve done was complicate some of the calculations. We’re going to have a separate presentation on pass through entities and that’s going to be a complication in itself. I also feel that there is some tax reform in there. They’re getting closer to eliminating the alternative minimum tax but overall it really was not tax simplification. We just have to be patient and I know we do a pocket tax guide and there was so many vague areas and if this is the first time in 40 years that I went through a tax act that there was just vagueness in the information being provided to us.
Dave: Sure.
Cindy: They’re not giving us any direct answers.
Dave: As you and I were preparing for today’s presentation we had a laugh or two as we talked about the presidents that you and I have practiced under and the various tax changes that occurred under each president and you brought up the term income averaging. Wouldn’t it be great to go back and have some income averaging.
Cindy: Made us look like heroes to our clients.
Dave: We’re showing our age a little bit. Let’s dig into the tax cuts and job act. This is specifically several of the provisions that will impact individuals. We can’t cover each and every one obviously but we’re going to skim through a couple of the ones that made the press and maybe you can confirm some of the things that you’ve heard, seen or put into play that certainly are real and live and ready to go in 2018. Let’s talk about the tax rate changes and the lower individual tax rates. Do you have a list of what those rates are?
Cindy: The rates to be effective are 10%, 12%, 22%, 24%, 32%, 35% and 37%. That’s being reduced from the original which were 10%, 15%, 25%, 28%, 33%, 35% and 39.6.
Dave: Lot of percentages there.
Cindy: Yeah, but they kept it to seven.
Dave: They kept it to seven. There you go. My understanding is these rates are not permanent that there’s a sunset provision.
Cindy: Yes and they do stop at December 31, 2025.
Dave: There’s a new term in our vocabulary, it’s sunset provision. That means when all of these things expire. They’re not permanent.
Cindy: Correct.
Dave: We heard a lot of information and obviously received quite a few questions regarding changes in capital gain rates and qualified dividends going forward. Is there any change in that area?
Cindy: There hasn’t been any change in the rates they’re still going to be the 0% taxation and so right now there is the 15 and 20. All they did was use the existing brackets and they indexed it for inflation to make it anybody in the 15% or lower bracket will still pay 0% and anybody in the 37% bracket will pay the 20% tax.
Dave: No change in the capital gain. That’s a good sign.
Cindy: Correct.
Dave: There are no sunset provisions for the capital gain as far as we can tell.
Cindy: No there is not. There still is that net investment income tax which came out too because of the affordable care act. For the 3.8% additional.
Dave: They didn’t get rid of that.
Cindy: They did not get rid of that.
Dave: Oh god. That seems to jump up and bite quite a few people.
Cindy: It does. It does.
Dave: We thought at one time that was going away. That’s not going away.
Cindy: It is not.
Dave: Anytime soon. We also heard and you referred in the opening, the prepayment of real estate tax and things like that. There’s a new standard deduction that’s coming forth in 2018 and beyond. What do you expect to see with standard deductions?
Cindy: Probably more people just filing a return with the standard deduction because it’s really hard to get off on a joint return to get $25,000 of itemized deductions. I can see a lot more people not being itemizing. It just seems, my clients are not going to hardly ever do they get to 24,000 unless they were extremely wealthy. 24,000 is a high number. The thing that people have to realize though is that you’re no longer getting a personal exemption.
Dave: Taking away the personal exemptions.
Cindy: Yeah. Is it a really a nice standard deduction now? Probably not.
Dave: This may be a little smoke and mirrors?
Cindy: Yeah, it will. In fact, what I’m probably going to do this tax season is to run a 2017, this is what you have and this is what’s on your return. But this is what it’s going to look like in 2018. We can do a tax projector and that’s where we’ll give an indication of how it’s going to impact our clients.
Dave: You’ve done a little bit of modeling let me go that direction. We’ve all done a little bit of modeling between the old rates and the new rates and on the models that you ran, again, this is not exact science, did you see anything odd? Was anybody saving a lot of money on the models that you ran?
Cindy: Probably the wealthiest because you have to realize that they eliminated the pease limit limitation on the itemized deductions. So nobody’s losing itemized deductions anymore. Where in the past they did. Right now, their bracket dropped. All the wealthiest are paying 39.6 under the current tax rates for 17 but in 2018 they’re dropping 2.6%. I see them being able to benefit.
Dave: Remember, this is a bipartisan presentation. But I understand. I understand that approach and that’s what we have heard from our clients. That’s what Main Street America has told us which is our clients. You’d mentioned personal exemptions. Let’s talk about that. What happened to the personal exemptions?
Cindy: They’re gone.
Dave: They’re gone.
Cindy: Yeah.
Dave: Forever?
Cindy: Til 12/31/2025. I don’t foresee them coming back. They could. Once again, sunset, new administration, they could come back. But right now they are gone.
Dave: Do I still get personal exemptions at the state level.
Cindy: In Ohio yes. Other states I’m not sure. They reduced theirs a little bit too based upon your adjusted gross income. But overall Ohio’s does provide them.
Dave: You and I also talk about a little bit of a byproduct of this federal tax act, that the states are going to catch up with this at some point and time and follow the federal rules and regs or make adjustments. We ought to prepare ourself and our clients for adjustments in the state and also maybe the local taxes.
Cindy: Any state that actually itemizes deductions like California, New York too, Ohio bases everything on adjusted gross income so the impact on Ohio probably isn’t going to have a lot of conformity with it. But it does impact many other states that actually use itemized deductions.
Dave: We talked in opening that certainly the bill was signed close to the Christmas holiday but now it’s in the hands of the Internal Revenue Service. I’m not sure I know exactly how that process works but what is the IRS doing at the present time? Are they going through the how to regulate the changes, the tax forms? Any thoughts in that direction?
Cindy: They are going to be doing that. They’re going to provide some example too. There’s going to be a need for examples for the past through entity changes. I also feel that kiddie tax, and I don’t know if everybody knows what kiddie tax is but in the olden days, which is 17 and before, there was a period of time where in order for if a child earned X amount of dollars, this year it’s under $2,100 of unearned income dividends, they were fined. Once they hit over the 2,100, they were paying tax at their parents’ marginal rate. What complicated everything was the you had to combine all the other siblings with that calculation. They did simplify that and what they’re doing now is they’re taxing the child at the single rates on their earned income and on their unearned income they’re going to tax them at the trust rates. Trust rates are really compressed. You hit the tax top bracket at a very, very low number, 12,000 plus.
It just, they did make it simple but now we don’t know what the standard deduction is. Nobody has ever been able to tell us, what is the standard deduction? Where they’re allowed to take it and not pay tax at the rates. We’re trying to clarify this, the IRS needs to at least tell us what that means. Going to our research product, they don’t know. They’re giving us all the old rates. We’re trying now to clarify it. This is the first law that really everything has been vague. Everybody whether it’s the research companies or the other professionals, they’re just quoting vague stuff. You’re never getting down to the detail.
Dave: That’s a good point. Our listeners just have to proceed with caution on what they hear and read or they see on Fox News or any other news agency that it may not be completely accurate.
Cindy: Correct.
Dave: Because it is. It’s not clear.
Cindy: And everybody’s interpreting it right now.
Dave: You’re right. It is not simplified in any means. Giving me an estimate, since this thing came out and started coming out, how many hours do you think you’ve put in researching, reading, talking? As a tax strategy professional you’re excited about this but this has consumed I bet a good part of your reading material.
Cindy: Yeah. I can look at my time sheet but that doesn’t even stop there ’cause you’re reading at home. You’re reading journals and every time you read something, something else pops up that you’re thinking about. It’s really, it’s is very consuming. It really is Dave. I don’t know when it will stop. This is the first time in any tax change that I had actually asked our tax research provider, “What does this mean?” And when they came back and quoted me the old rules, I knew that we were all issues.
Dave: We got some work to do.
Cindy: Yes.
Dave: Cindy, one of the things that we hear that the rules for withholding income taxes on your compensation are going to change some time in February, as soon as the IRS determines what the payroll tax forms and schedules and calculations are going to be. Is that true on what you’ve found and determined?
Cindy: Yes it is. Remember if you fill out your W4, you’re putting down the number of exemptions. Well exemptions have gone away so what are they going to use? It is going to be a complicated table and right now originally they were going to give the IRS the option to change it or not change it but the latest I read is that are going to make some modifications to the tables.
Dave: Should all of us on the listening audience fill out a new W4?
Cindy: Good question.
Dave: And what do I put on there?
Cindy: I know.
Dave: Just sign and turn it in, right?
Cindy: Some people will use a flat amount ’cause they know exactly what they know that they’re going to have to pay in by the end of the year. They may take it out as a flat amount over each paycheck. Other people will use a percentage.
Dave: Let’s get into some good stuff.
Cindy: Okay.
Dave: Okay? I’ve got a vacation home and my personal home and I’m one of those ones that just like to carry a lot of debt on those mortgages. I get a tax deduction for all of that. Are there any changes in the deduction for home mortgage interest?
Cindy: They did. They actually for any new mortgage entered into after 12/31/17, they’re limiting the mortgage to 750 on a joint return. For 750 for everyone. If it’s a married filing separate, it’s 375. That’s not so bad in Ohio but if you go to states like California, you can’t touch a house.
Dave: Left and right coast they’re in trouble.
Cindy: New York is exactly the same way. Those are the states where the taxpayers in those states might have a little bit of trouble trying to get the full benefit of their mortgage interest.
Dave: Hey I’ve got this figured out, I’ll just have 750,000 of mortgage interest and I’ll go out and get a home equity loan and put that deck in and the pool and all of that and deduct my home equity interest. Am I still allowed to do that?
Cindy: Sorry, no.
Dave: No?
Cindy: There is no deduction from home equity line of credits anymore. You will not be able to do that.
Dave: There could be, what do you do? There are going to be some people having to refinance I would imagine if they’re concerned about that mortgage interest deduction.
Cindy: Right. It was just easier to get a home equity line than to refinance your mortgage because of all the refinancing fees and everything else. But it may be worthwhile for them to try to do that especially if they can absorb it in their house, they have enough equity in it.
Dave: Sure. Let’s confirm the state and local real estate tax ceiling deduction for 2018. Lot of numbers tossed around. What’s the maximum that I can deduct on my return.
Cindy: The tax item on your itemized deductions can’t be more than 10,000.
Dave: 10 grand.
Cindy: Right.
Dave: Again, you have high areas, cost of living areas that aren’t very happy about this.
Cindy: No they aren’t.
Dave: Cleveland, Columbus, Cincinnati, you name it.
Cindy: In our state we do have state and local so you can easily get to the 10,000. There’s states like Florida that there is no state income tax. They might be more beneficial.
Dave: I’ve got this beat. I’ve got another idea. This is a planning idea. I’m going to make a charitable contribution to house state university and in that contribution I’m going to get football tickets and seating license to sporting events. If you’re not going to let me write off my mortgage interest, I’m going to make a charitable contribution. Is that a good planning technique?
Cindy: Not any more.
Dave: Not any more?
Cindy: In the past you were able to get 80% but not any more. They’re totally disallowing that as a charitable contribution.
Dave: So they denied the deduction for college athletic events and seating rights?
Cindy: Correct.
Dave: Oh boy. Let’s go to alternative minimum tax which in the past has caught a lot of people off guard. Is that still in play? Is there still alternative minimum tax going to be on your return and my return?
Cindy: We all usually have to calculate it to see if it does apply. Although the plan was to eliminate AMT or alternative minimum tax. That did not happen. You will see now less people probably being exposed to it because of the things that they’ve done to it. They increased the exemption so you have a higher exemption from the income that is exempt from AMT. They also increased the phase out ’cause that exemption was further reduced if you made too much money. Right now, that phase out is higher. There are probably going to be less people exposed to it. You’re still going to have it and without the add back for some of the itemized deductions that people we’re previously taking, I can see a lot more in future, a lot of my clients not being exposed to it.
They were saying that one third of Americans were paying AMT. It wasn’t intended to be that way, it was intended to impact the wealthiest who were taking deductions and getting loopholes. That’s was the intent of the AMT but it zapped a lot of other people or other taxpayers because of how it was calculated. And it was never adjusted for inflation until 2013. When it started to get adjusted for inflation, the exemption, then less and less people were exposed but there were still quite a few that have been.
Dave: Thanks for that comment on that ’cause we get a lot of questions on alt min, the alternative minimum tax. In the few minutes we have left, I want to wind down with just a couple short things. Obviously we’ve talked about half dozen tax pieces in this legislation, there are many many more, we just picked out the ones that are probably getting the most air time and the most questions that we are receiving. Let’s sit back and if I were to ask you who are some of the winners on the individual side with these tax cuts.
Cindy: Winners. I eluded to the wealthiest before Dave and they are going to be some winners in this. Parent with children under 17 probably too because of this increase in the child tax credit. That went up and a lot more is refundable. People with children over 17 and other exemptions that are for the, they’re not getting them so they’re going to probably be hurt.
Dave: So the winners and again, we’ve heard this, this is not the first, the high net worth, this is a bit of a home run in some places for high net worth.
Cindy: High net worth people yes.
Dave: What about the losers?
Cindy: The losers are going to be the people with big income and big deductions. Especially if their deductions included a lot of exemptions that they’re no longer able to get. What I’m going to do this year is keep track. I’d like to see.
Dave: All right.
Cindy: This is a good statistics program. Who really is benefiting and who is not benefiting? I’m going to keep track of my adjusted gross income, my taxable income, what the taxes this year and what I project it to be next year. Keeping track of some of these statistics, if we come back a year from now, I can let you know who the biggest losers and biggest winners are.
Dave: Great. Our guest today has been Cindy Kula with Rea and Associates from Cleveland Ohio. Thanks again for joining us on unsuitable today Cindy. Great presentation, a lot of insight. There’s so much to talk about on this topic and individual implications of the tax act. As you mentioned, you’re keeping track, we’re going to have to have you come back in May, June, July and give us those statistics after we put this in play.
Cindy: Sounds like a plan.
Dave: And we can really identify the winners and losers.
Cindy: Correct.
Dave: Hey listeners, we’ve started adding articles, tips and other insight to a dedicated research center on ReaCPA.com/taxreform. Be sure to check it out to learn more about tax reform. You can also send your questions to us at podcast@ReaCPA.com. Finally, don’t forget to follow Rea and Associates on social media for the most current tax reform news and information and be sure to tune in to Unsuitable over the next two weeks for additional tax reform conversations covering implications for business owners. You can also subscribe to the podcast on iTunes to ensure you never miss out on future episodes. Thanks again for listening. Until next time, I’m Dave Cain, encouraging you to loosen up your tie, and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own, and do not necessarily reflect the views of Rea and Associates. The podcast is for informational and educational purposes only, and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation, so they can expertly guide you to the best solution for your specific circumstance.