Many of my clients are facing higher federal income taxes this year as a result of the so-called “Tax Cuts and Jobs Act” that was passed by a slim minority of Republican lawmakers without the benefit of professional review that normally accompanies important fiscal social policy issues. While the law cuts taxes for most people, it increases taxes for about 1 in 4 upper middle income taxpayers in parts of the local region and particularly those with second homes in New Jersey. While the majority of taxpayers nationally pay lower taxes, a high percentage of my local Philadelphia / South Jersey clients will pay higher federal income taxes.
Political retaliation?
Some people speculate that the new federal tax law was deliberately meant as political punishment against these upper middle class taxpayers who tend to be educated and more loudly opposed to this specific group of lawmakers. A speaker at last week’s NJCPA’s continuing education program effectively summarized the new federal tax law by saying “We’re all screwed!”. Yet regardless of the politics, we have a real problem where many of my clients are facing a significant increase in federal income taxes this year. My comments focus the need to end the finger-pointing so that we can get to work on solving the very serious and immediate problem of higher taxes.
The problem illustrated
Analysis of this new tax problem usually indicates that the primary culprit causing the tax increase is the newly imposed limit on State and Local Taxes (referred to as “SALT”). The new tax taxes any amount that exceeds $10,000 per household. In many cases the total SALT for a duel income, two home client exceeds $30,000. That means that the net amount of more than $20,000 is taxed at ordinary income rates. At a 27% marginal tax rate, that means a tax increase of more than $5,400 for 2018. Some taxpayers affected may not yet be aware of the sharp tax increase and most have not made plans to handle it.
The ‘SALT Workaround’
Most states in high income areas in the east and west coast have developed ways to offset the financial effect of the federal tax increase by changing the way they collect revenue. This is commonly referred to as the “SALT workaround”. 33 states have current or proposed legislation to address this problem. New Jersey is leading the pack because the workaround is already signed into law. Other states will follow.
The legal timeline
There is a legal battle playing out behind the scenes that unfolded quickly this month. Here is the past-paced timeline and links to the underlying documents:
- On December 22, 2017 the President signed the hastily crafted federal tax law known as Public Law 115-97 or the “Tax Cuts ans Jobs Act”.
- On May 4, 2018 Governor Murphy signed, NJ S1893, a law authorizing local NJ municipalities to offer a workaround that allows residents to avoid the tax increase.
- On May 23, 2018 the IRS issued Notice 18-54
- On May 24, 2018 the New Jersey attorney General issued a warning letter to the IRS that the state will oppose any illegal and “misguided” attempt to interfere with the tax law.
Nobody can predict how this will end. The IRS will almost certainly support the method that keeps taxes highest. The states will likely prevail in the court system. It could be years before we have a clear answer. This is not what an average upper middle class taxpayer wants to hear!
The alternatives to save taxes
There are many other ways to avoid paying higher taxes this year that do not depend on the shifting political battlefront. I cover many of those other strategies here on this blog. The best way or Reducing federal income taxes requires active financial planning and time is running out for making these strategies work for 2018. Tax planning is most effective when started early in the year. Taxpayers tend to procrastinate so that the greatest demand for tax planning services comes in November and December. By then it may be too late to avoid a 2018 tax increase.
An offer to get started
For a free checklist of proven legal tax reducing ideas that might help use this secure online inquiry form.
If you know that you are among those hurt by the new federal tax law and are concerned about this year’s tax increase, I invite you to schedule a no-obligation telephone discussion of your unique tax situation and what can be done about it. My contact information is listed on this page.
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