With President Donald Trump’s signature last Friday, the Republican-controlled Congress’ $1.5 trillion tax bill is now law.
Although it maintains the seven-bracket tax rate structure, it lowers the rate for individuals making over $500,000 per year from 39.6 percent to 37 percent. It also increases the standard deduction to $12,000 for singles and $24,000 for married couples, and it eliminates personal exemptions; it also places limits on some itemized deductions such as the state and local tax deduction, and mortgage interest deduction.
For businesses, the bill cuts the corporate tax rate for businesses from 35 percent to 21 percent.
Washington Jewish Week caught up with Jewish tax lawyer David De Jong last week, of the Rockville law firm Stein Sperling, to discuss how the bill may effect home-buying, charitable donations and businesses starting next year.
In your professional opinion, is this a good piece of legislation?
This is not a good bill for the Washington metropolitan community and the Jewish community. The metropolitan area tends to have individuals who have higher-priced homes, and the limitation beginning in 2018 on the combined state income tax deduction and the property tax deduction of $10,000 is going to dramatically reduce the itemized deductions that so many people have in various neighborhoods, particularly in the Jewish community. Property taxes alone may exceed that $10,000 threshold.
The loss of those two deductions is far going to exceed any other benefits that might exist in the legislation. I also think it’s going to have a real chilling effect on property values of homes over $1 million. There are large segments of the Washington metro area of homes over $1 million. Existing acquisition debt is grandfathered in, but people moving into a different home or their first home will only be able to deduct mortgage interest of $750,000. That is effectively down from $1.1 million.
How does the bill affect millennials, many of whom live in urban areas with high tax rates such as Washington?
It is going to hurt the millennial when he or she is looking to buy their first home, where a mortgage would be in excess of $750,000 and we know we’re looking at high property taxes in most metropolitan areas. And it’s going to have an affect on first-time home buyers as well as those seeking to move to a more expensive areas.
Who has benefited from state and local tax deductions, which are now curbed by the new law?
People in high tax areas. The Maryland and D.C. income tax rates are considerably higher than in Virginia.
How will the new law affect charitable giving?
There will be a significant reduction in the number of individuals who will itemize, with the standard deduction being almost doubled and the cap on deducting state income and local property taxes. With those two things decreasing the number of people who itemize — that’s going to have a chilling effect on charitable contributions from individuals who are not wealthy.
The individual who might donate $100 or $500 or even $1,000 to Jewish or other charities — if the person is not itemizing, they get no tax benefit. Previously, between the federal and state combined rates, a donation of $1,000 really might only be $600 out of pocket. Now it’s a full $1,000 out of pocket.
One benefit for people who are inclined to donate is that the deduction limit in relation to adjusted gross income previously was 50 percent. In other words, if you had income of $500,000, your limit on donations was $250,000. It has been increased from 50 percent to 60 percent. That is a plus.
Here’s a negative: The legislation removes the charitable deduction entirely for colleges and universities where you get preferred seating as a result. Many top university sports programs are dependent on their football or basketball following, and people make substantial donations to enjoy good seats. If you donate to a university and you have preferred seating for sporting events, a percent of your donation is deductible.
What about donor-advised funds as an alternative to itemizing?
An advised fund is a completed donation, where instead of setting up your own foundation, you provide advice and guidance to the representative from the fund. I don’t think that’s going to affect the people who will not be itemizing, because it is wealthier people who donate to donor-advised funds.
The new law reduces the tax rate for large corporations, but what about small businesses?
Small businesses are getting benefits. There is going to be a greater use of cash-basis accounting permitted which is favorable to small businesses. It will help keep their income down, and also will make their accounting potentially simpler. Large businesses will get the benefit for a period of time, but for a period of several years all businesses will be able to write off capital expenditures. It’s a benefit across the board for businesses.
Has the American public been sold on this plan?
If you look at the polls, you see a margin of 2 to 1 of people who don’t like it, and they seem to believe the critics more than they believe the president. Deductions are very precious to individuals. I think that is what people are noticing. The people perceive this as a benefit for the very wealthy. They perceive the reduction of 39.6 percent to 37 percent as a benefit for the wealthy, and it is. And they perceive themselves as not getting very much, and that is correct for people that have historically run high deductions and have counted on reducing their taxes through a more expensive home and they’ve chosen to live in states with higher tax rates.
For people who have one home in a high-tax area and a winter home in Florida, where they spend three or four months, is presumably going to get them down to Florida for six months and a day to avoid a state income tax, because it’s no longer going to be deductible.