I’ve spent a lot of time and written a lot of articles praising the Tax Cuts and Jobs Act of 2017. However, there are some real bad things about the new tax law that I have neither mentioned nor have really seen discussed. I think that it would be appropriate to take a moment to point out the items in the new law that are head scratchers to me.
First, we have the decentivization to itemize our deductions. The standard deduction is $12,000 for individuals and $24,000 for those married. Thus, the itemized deductions have changed. The most that you can deduct for property, state, local, and sales taxes is $10,000. The medical deduction has gone back to 7.5 percent of adjusted gross income (AGI), down from 10 percent of AGI. The mortgage interest deduction is only good for property that is $750,000 or less, which is down from $1 million.
Charitable contributions have been raised to 60 percent of AGI, from 50 percent. And Miscellaneous Itemized Deductions, which included unreimbursed employee expenses, tax prep fees, and others have been eliminated.
Remember that itemized deductions were incentives to do certain things like buy a house, give to charity, all pretty much gone for a majority of people.
The Alternative Minimum Tax (AMT) was supposed to be eliminated for individuals. It was eliminated for corporations. For individuals the exemptions have been increased, but AMT is still there. AMT is an alternate calculation of your taxable income that is paid in addition to your ordinary taxes.
That’s not to mention that personal exemptions for you, your spouse and dependent have been “suspended.” The law actually says that these exemptions have been suspended, without any other explanation. I guess it would make it easier to reinstate them rather than process it as a complete elimination.
Income on S Corporation, partnership, and sole-proprietorship has this convoluted and confusing way of being taxed. Basically, you receive a 20 percent deduction of taxable income. However, that amount phases out based on income. If you followed this thing from the beginning, pass-through income was supposed to be taxed at a 20 percent tax rate.
However, I see no reason for a business to be an S Corporation anymore. There were already rules for S Corporations that disallowed fringe benefits and demanded reasonable compensation for S Corporations. Why would I want to live under those rules, when I can easily just pay tax at 21 percent and deduct my fringe benefits?
There are just a lot of head scratchers here. I know that things will be added and taken away in later years, but those are the horrible things about the new tax law.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...