Getting Ready for Taxes in a Year of Fundamental Change

As millions of taxpayers wrap up their 2017 income tax return filings this month, most would rather be thinking about things other than next year’s tax return – springtime, gardening, baseball, to name a few. Because taxes factor into so many of the financial decisions we make, however, it’s important to keep them in mind all year round. And that’s especially true in 2018, thanks to the sweeping new tax reform passed by Congress.

From one’s income tax bracket to the deductions one has traditionally taken, and from charitable giving to the taxes on small businesses—just about every taxpayer’s financial picture has changed in some way under this tax law.

Adding to the complexities is the fact that there’s very little in the law that could be characterized as “one size fits all.” While many if not most taxpayers will benefit from reduced income tax rates, even people of similar income levels could face decidedly different federal income tax liability based on their individual circumstances or geographic location.

For example, one of the most important changes is the new $10,000 cap on the deduction for property and state and local income taxes. Likewise, there are new limitations on the size of the loan on which someone can deduct mortgage. For someone in a lower-tax state such as Florida, tax savings may be significantly greater than for someone in a higher-tax state in the Northeast. Not that we’ll see a mass exodus from New York to the Sunshine State. Taxes, after all, are just one of many factors that determine where we choose to work and live. But this does speak to the importance of having detailed conversations with a tax specialist to understand clearly what the impact on one’s own taxes is likely to be.

Taxpayers will also face the decision of whether to itemize their deductions. Thanks to a standard deduction that has nearly doubled to $24,000 for married couples ($12,000 for single filers), combined with the elimination or limitation on certain deductions. The House Ways and Means Committee estimates that the number of taxpayers who itemize will drop from about 30% to about 10%.[i]

Though moving to a standard deduction eliminates one’s ability to deduct charitable gifts, American generosity will surely continue. Studies such as our U.S. Trust Wealth and Worth Survey[ii] consistently show that tax savings is not the main reason people support causes they care about. Yet now may be a good time for people to review with an advisor how giving fits with their other financial goals. And even for those who assume they’ll be among that 90% taking the simpler path of standard deductions, a major event such as an unreimbursed medical expense could make itemizing the tax-efficient choice in a given year.

For owners of a business such as an S corporation, an LLC, a partnership or a sole proprietorship, one of the most significant aspects of the new tax law is the ability to potentially deduct 20 percent of business income in computing their tax liability. But there are restrictions. “Owners of certain service businesses,” such as doctors, lawyers, accountants or consultants (among others) only get the full deduction if their income falls below certain levels. If it surpasses those levels, the deduction goes down or disappears entirely. Even the experts are still figuring out the finer points of the rules for small businesses, and the Internal Revenue Service is expected to offer some additional guidance later this year.

What this all adds up to is a good chance to have conversations about taxes, now and throughout the year. A little clarity on this confusing but vital part of our financial lives can make it that much easier to enjoy the spring.

Keith Banks is Vice Chairman of Global Wealth & Investment Management, Head of the Chief Investment Office and Investment Solutions Group (CIO/ISG) for Merrill Lynch and U.S. Trust.

Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation (BofA Corp.). Merrill Lynch and U.S. Trust are affiliated subdivisions within GWIM. U.S. Trust operates through Bank of America, N.A., Member FDIC, and other subsidiaries of BofA Corp. such as Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and Member SIPC

 [i] “The Tax Cuts and Jobs Act: Communications and Policy Details,” House Ways and Means Committee.

[ii] “Wealth and Worth – Making a Difference,” U.S. Trust.

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