This is the time of year that many Napkins puzzle over tax strategy. This year will probably find vastly more taxpayers, along with a good share of the accounting community, perplexed by the many changes that went into effect as a result of the 2017 Tax Cuts and Jobs Act.
The single biggest change for those of us in Napa Valley will, undoubtedly, be the limitation on State and Local Tax (SALT) deduction to $10,000. Living in one of the most expensive areas in the nation with housing prices triple many other locales and a State tax burden that is among the highest in the country, the SALT deduction limitation will affect many taxpayers in the Valley. With a Median Napa home price of about $650K, the average taxpayer is likely to have Property Taxes alone in the range of about $8,000. For a married couple with the average Napa household income of $90,000, State Income Tax would be over $2000, bringing the “average” couple right up to the $10,000 limit. Anyone with a more expensive home or higher income will obviously be faced with losing some of the benefit from itemizing. Another change affecting those who itemize; the mortgage interest deduction is now capped for new loans at a maximum of $750,000. Also, the Home Equity Line of Credit interest deduction can now only be deducted if proceeds are used for “substantial improvements” in the Primary Residence.
Offsetting this will be two favorable changes in taxes that might help some taxpayers. The Standard Deduction for Married Filing Jointly is going from $12,700 to $24,000 and almost all tax brackets have been reduced by 1-4%.
These changes mean that far fewer individuals are expected to use Itemized Deductions to reduce their taxable income going forward. The IRS states that they now expect 85% of all taxpayers to take the Standard Deduction, up from 70% previously.
Of course, there are a many other significant tax changes, as well. A new IRS Code Section 199A allows small business earners engaged in a Qualified trade or business to deduct 20% of Qualified Income from taxable income. This benefit helps those with “pass-through” income; such as Sole Proprietors, S-Corps, LLC’s and Partnerships.
The final change I’ll mention is the huge increase in the Estate Tax exemption. This has gone from almost $11 million for married couples in 2017 to $22.36 Million in 2018. The net impact is that far fewer estates will now be subject to estate tax. This will be particularly beneficial for the Valley’s many agri-businesses that own large amounts of land and would otherwise have to come up with significant cash to pay estate taxes.
One last point: most of these changes are due to sunset and return back to 2017 levels by the end of 2025. So, speak to your financial advisor now to take advantage of these tax changes before they become just a faded memory!