USA Wolloped by the 2018 Tax Law!

[Markg22b]

I asked our CPA to run an approximate 2018 proforma tax liability after completing 2017. We were both taken aback by the incredibly (and apparently as yet generally not understood/appreciated) pernicious effect of the new tax law on a large chunk of the middle class.

Our estimated 2018 federal income tax will increase by ~4.5 times.

We are retired. Our income is comprised of qualified capital gains, dividends, and ordinary income from social security and IRA distributions. We have a large medical/health deduction along with home interest and charitable deductions. We can no longer deduct our CFA’s investment expense.

We have used the same CPA for 18 years and our income tax has remained relatively constant since retirement.

Generally speaking, according to our CPA, the 2018 income tax formulas are throwing folks with an adjusted income between $80,000 and $200,000 into what she referred to as a ‘faux AMT’.

I’m curious, if not amazed, at the absence of public (middle class) outcry?

I’m very interested to hear what you all have found and have to say in this regard.


Mark

 

[bklynboy]

My understanding is that the tax law did not change for medical deductions, home interest (up to 750K loan) and charity so that leaves the AMT.

I did my taxes for 2018 a while back and they actually go down despite the SALT deduction no longer in place. Not sure what your accountant meant by "faux AMT" as the AMT limits were increased so that less people are impacted by it and I did benefit from it based on what I expect to earn in 2018. In fact I have read that roughly 200,000 people are now impacted by the AMT compared to 5.25 million previously and its mostly high wage earners.

The amount of income automatically exempt from the AMT calculation has been increased to $109,400 for joint filers, up from $84,500 meaning exemption levels are higher so less AMT. Also, the exemption phaseout level -- which is the income level above which you gradually lose your income exemption, until it disappears completely was also raised to $1 million for joint filers, way up from $160,900. A lot of households making between $200,000 and $1 million will now get to take full advantage of the exemption levels, whereas before they could not.

I would ask your CPA for a straight answer and not some vague reply as to why the AMT is hurting you when it did not in the past given what is happening in the tax code. Also, compare the returns side by side yourself so you can see where the movement is coming from. My guess is it should not have increased 4.5x if your income levels and source of income are the same year over year.

 

[bklynboy]

Also, make sure you understand specifically what is happening and any good CPA should be able to communicate this to you in a way you can digest.

My brother last week complained that his taxes went up in 2017 due to Trump as communicated by his CPA. I explained the tax rules did not go into effect yet so could not be Trump and after looking at his return found 2 areas that raised his tax.

First his income went up 40,000 as he worked more OT. Secondly he files both a K1 and Schedule E for real estate rentals - however he had income this year on the K1 and a loss last year so this raised taxes. From the Schedule E - loss which was similar to last year was phased out for deductibility based on higher AGI (past year he could deduct loss as income was below the limits that permits up to a 25K deduction for passive losses). After seeing this he understood it and was surprised his CPA did not explain it right.

My point is understand what is happening before saying there should be an outcry. It very well may be your taxes are going up but from everything I read and know you are in the minority and most middle class will get lower taxes (excepting those that lost SALT as this can be big).

 

[Markg22b]

Right off I wish to express my appreciation for the time you've taken to discuss the problem.

I'm not sure she coined the term 'faux' AMT or I did. Her point being, yes the AMT was significantly de-clawed by the tax law but the residual impact on us was just as bad as the AMT. I retired and closed my business some years ago and while in business consistently fell into the AMT every year. This does not bring back fond memories. Contrary to your brother, I can assure you that our income sources did not change year over year. The total income was very close and our deductions were the same if not a bit more apart from the loss of the investment expense deduction.

After we received our completed 2017 personal tax return and the proforma 2018 along with the quarterly tax payments for 2018, I dropped off some trust information for which my wife is executor. It was at that time the CPA said that (without exclusions) anyone with income between $80 and $200k would find themselves much more heavily taxed for 2018. It was at that time she compared this heavier tax to the prior impacts of the AMT on certain income groups.

When I came home I told my wife that I was seriously considering paying another CPA to rerun a 2018 projection based upon our 2017 data and if necessary in so doing, audit our 2017 return for efficacy.

Maybe a day or two later, I emailed the CPA and tried to get a better understanding of the mechanics behind this huge tax. I am inserting the last portion of that email as follows:

[Me] "Since your proforma tax projection for 2018 uses the same inputs as 2017, since the $0 tax on the first $72k remains the same for 2018 as with 2017, the tax rate on the balance of our adjusted income above $72k is the only variable that could change (apart from the loss of the investment expense deduction) and cause the huge difference in tax liability between 2017 and 2018.

Can you better define the specifics of the change on that dollar amount, or, alternatively, the different IRS calculation on that remaining dollar amount?"

[CPA reply] "I don’t think I can better define your situation, and I don’t have a program to work through the detail of the calculations. If I do this by hand, you won’t be happy with the bill I’ll send you."

So that's where we are at the moment. Based upon what you've said we will absolutely locate a well regarded CPA to perform the review. I just hope CPA's are like physicians in this regard and abhor the thought of checking a colleague's work!

Mark

 

[bklynboy]

Perhaps others on this forum can opine if they see this happening - especially anyone that has a tax practice can provide more input. I no longer do tax returns as a business but still do them for myself and family and I have not seen this type of impact but then again the devil is in the detail and without seeing your specific returns hard to say what is going on here.

 

[Markg22b]

One last question for you.

Would you presume that the IRS has released sufficient 2018 tax law information to enable the majority of the tax filing software applications that CPA's use to be currently and sufficiently accurate to correctly produce a 2018 proforma return?

 

[bklynboy]

I do think the law is now well understood. Not sure what has made its way to software programs as I no longer handle individual taxes. I can say our corporate software is updated and I imagine others are as well.

 

[geezer]

The professional tax software I use has components to estimate the changes for 2018-based on amounts reported in 2017. I believe a tax preparer would have to be using an additional tax planning software for more detailed estimation work.

 

[Markg22b]

I have an appointment with another CPA May 29 to double check the '18 estimated tax using our '17 data. If nothing else, I'll get an explanation.

Thanks for the assistance.

Mark