Tax changes for 2018

[Number Six]

How much of a problem is this going to be for tax professionals and taxpayers since the changes appear to be so sudden? I've read a lot of quality commentaries and it looks like it could be a boon for CPAs.

[Arthur Rubin]

Tax Preparer Full Employment Act of 2018....

But it could have been worse better (for tax preparers)...we've had retroactive major tax changes in February.

[Famspear]

I have noticed one provision (so far) that is effective for certain transactions in the latter part of this year, 2017 (and, to that extent, the law is effective retroactively), but most of the provisions appear to become effective beginning for the 2018 tax year.

This law, the "Tax Cuts and Jobs Act," has been touted as a major re-write of the Internal Revenue Code, and it is really not that in my view. Some of the changes to the income tax portion of the Code are important, but the vast bulk of the income tax portion of the Code is unchanged.

I saw one media report that incorrectly described the law as being over a thousand pages. The reporter was obviously looking at a PDF copy of the December 15, 2017 Conference Committee release -- which contained the proposed statutory text in double spaced format PLUS the committee reports (the committee reports are not part of the law). In that format, the text of the bill was about half of the 1,000 pages.

The actual enrolled bill, in PDF format, is 185 pages single-spaced. That's probably close to (or exactly) what the President signed into law on Friday, December 22, 2017 (now Public Law no. 115-97), based on what I see in a photograph taken of the enrolled bill on the President's desk when he signed it.

By contrast, just the "income tax" portion of the "hard" copy of Internal Revenue Code of 1986 on my desk at work (which is also single-spaced, in small font, and includes most but not all of the text enacted since August 16, 1954 plus excerpts from uncodified portions of hundreds of the enactments since 1954) runs to literally thousands of pages, out of wayyyyy over 5,000 pages in total.

Curiously, as signed into law by the President, the official "short title" of the law is not the "Tax Cuts and Jobs Act", even though that verbiage is found in the law nine times. At just about the last minute before the Senate vote on the night of December 19-20, the "short title" was stripped out of the bill, apparently to comply with a technical restriction in the Byrd Rule -- since the bill was considered a reconciliation bill.

I believe just about everyone will continue to call it the "Tax Cuts and Jobs Act."

[Duke2Earl]

As a retired tax partner at a Big 4 firm.....I am soooooo happy I am retired. I know exactly what is happening at the old firm. The entire tax department is working around the clock. The concept of seeing their families over Xmas is beyond reality. It's a death race to contact all their clients as soon as possible. The National Tax Department where I used to work has got to analyze and distribute a full analysis of the law and every trick and trap in a booklet and there is a a serious active competition to see which of the big firms gets its book to the press first. It's pretty brutal but the good news from their perspective is that the Tax departments will make a fortune next year. So glad to be out of it.

[NYGman]

Been thinking about ways around this whole property/SALT issue which looks like it is designed to harm home owners for no reason whatsoever. So far my idea is to form a family LLC to drop my house and mortgage into. Then will charge myself some market rent, deduct the depreciation and all the property tax, reducing any income to nothing. Then I can claim the 10k state tax deduction on my return.

Thoughts?

[Famspear]

Been thinking about ways around this whole property/SALT issue which looks like it is designed to harm home owners for no reason whatsoever. So far my idea is to form a family LLC to drop my house and mortgage into. Then will charge myself some market rent, deduct the depreciation and all the property tax, reducing any income to nothing. Then I can claim the 10k state tax deduction on my return.

Thoughts?

Two questions:

1. How would that arrangement change your economic position in a meaningful way (apart from the tax effect of getting the deduction)?

2. What would be your purpose for setting it up that way (aside from trying to get the tax deduction)?

[LaVidaRoja]

Remember too - if you plan on selling the property within the next 10 years, you will have abolished to ability to not report the gain. Ponder that as well.

[Burnaby49]

Canadians have never been able to deduct provincial or municipal taxes from our federal income taxes. Somehow we've survived. We can't deduct interest either. Either for home mortgages or personal debt. Again, somehow, we struggle on.

One advantage we have over you Americans, although essentially a lottery win, is that the gain on the sale of personal residences is entirely tax free. Take a hypothetical example, say a fictitious homeowner named Burnaby49. Let's assume he and his wife purchased a home in Burnaby, British Columbia in the mid 1970's and still reside in it today. The property tax assessments, which are considered to be a relatively accurate assessment of current market values, say that Chez Burnaby is now worth approximately 28 times what our hypothetical family paid for it. Our lucky lottery winners will get that money tax-free when they sell. Lotteries are a good comparison since lottery winnings are also tax free in Canada.

[NYGman]

Been thinking about ways around this whole property/SALT issue which looks like it is designed to harm home owners for no reason whatsoever. So far my idea is to form a family LLC to drop my house and mortgage into. Then will charge myself some market rent, deduct the depreciation and all the property tax, reducing any income to nothing. Then I can claim the 10k state tax deduction on my return.

Thoughts?

Two questions:

1. How would that arrangement change your economic position in a meaningful way (apart from the tax effect of getting the deduction)?

2. What would be your purpose for setting it up that way (aside from trying to get the tax deduction)?

1) part of a larger plan to invest in to real estate, as now holding rental property is more enticing, as some of the top benefits of ownership are going away, making rental an attractive proposition for others. So this is more a holding company now, to limit liability exposure to the full Rental Real estate business that will follow. Have to start somewhere. This bill alters the economics of home ownership, likely reducing property prices (ripe for investment) and making renting closer economically. In today's disposable economy, this will be a boon for the property holders. Increasing rental demand, and I want in.

2) Want to take full deduction of property tax and get the 10k of State and local. Also may be better for estate planning? Ultimately, if it is to be run as a rental business and more properties are acquired, need to limit liability. Have to start somewhere though.

As for gain on sale, currently not planning on moving in the foreseeable future, and at that point like kind exchange may cover gain deferal.

Not saying it works, and numbers need to be crunched, but just my gut reaction to being penalized for choosing to build equity and to own my home in a high tax state, rather than rent, and make someone else rich. This tax bill favors holding rental property over home ownership, and I am looking for a way to combine both. I get a better tax answer if I rent, as I can then at least deduct 10k of my state tax. However if I own my home, I blow through the 10k on property tax getting no state tax benefit. If I held my home as a rental, I could deduct the full property tax, and as expenses would at least initially outpace income ,would run a loss for a few years, with the hope that buys enough time for this to be fixed.

Ultimately it is just a mental exercise to see if there is a way to work this that I think is fair, without getting in to a political discussion as to why it is the way it is.

[Famspear]

1) part of a larger plan to invest in to real estate, as now holding rental property is more enticing, as some of the top benefits of ownership are going away, making rental an attractive proposition for others. So this is more a holding company now, to limit liability exposure to the full Rental Real estate business that will follow. Have to start somewhere. This bill alters the economics of home ownership, likely reducing property prices (ripe for investment) and making renting closer economically. In today's disposable economy, this will be a boon for the property holders. Increasing rental demand, and I want in.

2) Want to take full deduction of property tax and get the 10k of State and local. Also may be better for estate planning? Ultimately, if it is to be run as a rental business and more properties are acquired, need to limit liability. Have to start somewhere though....

I see a big potential problem with starting this project with your primary residence. If you put the home in a family LLC in the way you have described, you would need to be very confident that you would be successful (if it came to litigation) in asserting both (1) that the arrangement changes your economic position in a meaningful way aside from the proposed tax effect (an objective standard), and (2) that you actually have a substantial purpose for engaging in the transaction other than the proposed tax effect (a subjective standard).

I would feel shaky about trying to argue in court that I plan to have my family LLC buy more properties at some time in the future. I can see the government arguing: "Yeah, Mr. Taxpayer, you have to start somewhere. But the proper place to start is by having the LLC acquire properties you don't already own -- not by putting your personal residence into the LLC and paying rent to yourself. You're just trying to get a tax deduction by changing the form of ownership, without changing the economic substance."

[NYGman]

Have an existing family LLC with an office building, could use that if I needed to, but ownership is more diverse that I wanted, or alternatively, I can purchase an additional property in Florida, on the cheep, to throw in to the new LLC to add to the economics.

[Burnaby49]

I can say, as someone who worked in tax for 35 years, that you Americans have my sympathy. Not because of a personal opinion on whether the tax changes are reasonable or not, I have no clue, but because of my personal experiences with the massive uncertainty that always accompanies significant changes to the Income Tax Act. Overhauls to the Act always caused me problems but didn't cost me money. Every time there were significant proposed changes to the Canadian Act lawyers and accountants went into a frenzied overdrive to try and discern the consequences and that's exactly what you're facing now.

I don't want to even think about the Canadian government's new proposals regarding dividend sprinkling and the uproar it's causing. I used to work in that area and I'm happy to be out of it.

[Famspear]

Just today, I noticed this -- buried in the Tax Cuts and Jobs Act signed by the President.

SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO NONDISCLOSURE AGREEMENTS PAID IN CONNECTION WITH SEXUAL HARASSMENT OR SEXUAL ABUSE.

(a) DENIAL OF DEDUCTION.—Section 162 is amended by redesignating subsection (q) as subsection (r) and by inserting after subsection (p) the following new subsection:

‘‘(q) PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL
ABUSE.—No deduction shall be allowed under this chapter for—

‘‘(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

‘‘(2) attorney’s fees related to such a settlement or payment.’’.

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to amounts paid or incurred after the date of the enactment of this Act.

---Sec. 13307, Tax Cuts and Jobs Act, Pub. L. No. 115-97 (Dec. 22, 2017).

That’s the current law now, for applicable amounts paid or incurred after December 22, 2017.

If this particular provision has been mentioned in the news media, I missed it.

[Mider]

This is going to be a nightmare. We have been fielding calls by the truckload here. The SALT deduction is going to be nasty but so will a lot of other changes. Alimony not being included in income or as a deduction starting 2018 on new decrees. One of the worse will be the Section 121 gain on home sales if income is over $1,000,000, it looks like at that level all gain will be taxable and no exclusion.
I spent three days in a Don Farmer seminar here and at the end he just threw up his hands and said everyone needed to come back for the refresher course on the new law at the end of Jan.

[jcolvin2]

Alimony not being included in income or as a deduction starting 2018 on new decrees.

I think the alimony change is effective for decrees entered after 12/31/2018. I foresee a December, 2018 rush to have final decrees entered and preserve the alimony deduction (which allows the former couple to pay lower taxes in the aggregate). For a quick and dirty take on the new alimony provisions see:

http://procedurallytaxing.com/the-end-of-alimony/

[Mider]

Your correct my bad, they changed it from the first seminar I went to, giving a little more of a buffer. The one thing I have not seen though is if the decree is changed or adjusted. I am guessing it would remain the original date.
We have been getting daily updates from four different tax information agencies, BNA, Parkers, Thomson and they don't know all the nasty gems hidden in it.
I have been running projections and payroll since Christmas. I do like that the IRS waited until almost the last day before issuing the ruling about paying property taxes for 2018, not having an assessment means no deduction.

[Arthur Rubin]

I do like that the IRS waited until almost the last day before issuing the ruling about paying property taxes for 2018, not having an assessment means no deduction.

There has been discussion on several tax boards I monitor, but consensus seems to be it's the current law and the IRS's present interpretation of the current law. The new law makes it more clear (although it may apply only to income taxes).

[morrand]

I do like that the IRS waited until almost the last day before issuing the ruling about paying property taxes for 2018, not having an assessment means no deduction.

There has been discussion on several tax boards I monitor, but consensus seems to be it's the current law and the IRS's present interpretation of the current law. The new law makes it more clear (although it may apply only to income taxes).

So, there was a canard out there about paying up your property taxes in advance in order to deduct them (current tax plus the, ahem, "advance deposit") under the more favorable 2017 rules. It sounds like this ruling is supposed to kill off that idea before too many people try to take advantage of it. Is that what it is?

[Pottapaug1938]

Both cities where I own real estate assess property taxes on a July 1-June 30 basis, so my wife and I could have prepaid ours for the first half of 2018; but since one property is a rental property, and since we rent out our upstairs (thus permitting deductibility at least in part), we chose not to prepay either one.

[Famspear]

Excerpt from an article published today, Feb. 24, 2018:

This is not normal': Glitches mar new tax law
Republicans want to make fixes, but Democrats aren't rushing to help them.

by Brian Faler
February 24, 2018

xxx

The glitches in the new tax law are starting to pile up.

One inadvertently denies restaurants, retailers and others generous new write-offs for things like remodeling.

Another would allow wealthy money managers to sidestep a crackdown on lucrative tax break that allows them pay lower taxes on some of their income than ordinary wage earners. A third creates two different start dates for new rules that make it harder for businesses to shave their tax bills.

There are dozens of other snafus, hitting everything from real estate investments to multinational corporations to farmers.

It’s hardly surprising there would be bugs in the sprawling new law H.R. 1 (115), but some experts say the sheer number is unusual, and blame the breakneck pace at which the legislation was pushed through Congress.

“This is not normal,” said Marty Sullivan, chief economist at the nonpartisan Tax Analysts. “There’s always this kind of stuff, but the order of magnitude is entirely different.”

[ . . . ]

Some of the glitches are simple drafting errors. Others would have unintended consequences. Still others are things in the law that aren’t clear

One snafu, which could potentially affect President Donald Trump’s real estate business, prevents people making various types of improvements to non-residential real estate from immediately deducting their entire cost, as lawmakers intended. An apparent typo means they have to instead take those breaks piecemeal over the next 39 years.

[ . . . ]

Another bug may allow hedge funds, private equity firms and others to dodge a crackdown on the rules surrounding so-called carried interest by taking advantage of a vague reference in the law excusing corporations from the new rules. Lawmakers appear to have meant C corporations like Apple or Ford, but lawyers say it could also excuse S corporations, which could be easily used to duck the restrictions.

[ . . . .]

Another glitch allows people investing in real estate to claim a new deduction for pass-through income – but only if they own real estate stocks directly. If they own them through mutual funds, as many Americans do, they don’t qualify for the break.

[ . . .]

Pam Olson, a former top tax official in the George W. Bush administration, is not optimistic lawmakers will be able to address the glitches this year. Aside from the partisan tensions over the new law, she’s not sure how much appetite lawmakers have to wade back into the issue, especially when it comes to fixes that go beyond simple changes like correcting typos. [ . . .]

One error is the provision that attempts to make receipt of alimony be non-taxable. Instead of enacting a provision that makes the receipt be non-taxable, Congress simply deleted (1) section 71, and (2) the brief reference to "alimony" in section 61.

As anyone who has studied tax protester arguments knows, that does not really get the job done properly. The whole point of the list of the various types of income in subsection (a) of section 61 is that it a non-exclusive list; merely deleting an item of income from the list does not make the item be non-taxable, under the ordinary rules of construction as interpreted in one court case after another.

This problem was clearly communicated to the House Ways and Means Committee during markup, but nothing was done about it. Everything was rushed through.

I may have mentioned this error here in Quatloos before. Ward Hussey must be spinning in his grave.