A fresh look at tax reform

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Since tax reform was enacted on December 22, the IRS has been hard at work trying to figure out how to implement the law. They still have a long way to go, but you can keep up with their efforts on their website: www.irs.gov/newsroom/tax-reform. In the meantime, here are some key points.

Alternative Minimum Tax

Tax reform has already accomplished one very important objective: it has saved millions of taxpayers from the clutches of the Alternative Minimum Tax.

The Alternative Minimum Tax, or AMT, has its roots in tax reform legislation passed nearly 50 years ago. In 1969, Secretary of the Treasury Joseph Barr testified in Congress that 155 individuals with incomes above $200,000 (about $1.1 million in today’s dollars), paid no income tax. The resulting uproar led Congress to impose a “minimum tax” based on the total value of the taxpayer’s tax preference items.

The original minimum tax was an add-on tax, meaning it was calculated and added to the taxpayer’s regular income tax. In 1982, the minimum tax was replaced with the “alternative minimum tax,” or AMT. The new AMT established a parallel tax system. In this new system, the taxpayer calculated the taxes she owed under both the regular tax system and the alternative system and paid the higher of the two. This is the AMT system we have today.

Unfortunately, the 1982 version did not include inflation adjustment provisions for exemptions and phase-outs. As a result, over time, an increasing number of households became subject to the AMT. By 2017, more than 4 million taxpayers were ensnared in the AMT. With tax reform, that number is expected to drop to 200,000. While the reform did not succeed in repealing the AMT, it is clearly a step in the right direction.

State and Local Tax Deductions

The new tax law limits the deduction for state and local taxes to $10,000, a measure that obviously hits hardest in higher tax jurisdictions. This “blue state penalty” has led some lawmakers in those states to consider proposals that would allow taxpayers to make payments to specific “charitable” entities in exchange for a credit against state and local taxes. The IRS was not pleased.

Last week, the IRS issued Notice 2018-54 reminding those legislators that the IRS controls which entities qualify for charitable deductions on federal tax returns. The IRS further stated that “taxpayers should also be aware that the U.S. Department of Treasury and the Internal Revenue Service are continuing to monitor other legislative proposals that are being considered to ensure that federal law controls the characterization of deductions for federal income tax filings.” In other words, don’t let ‘em fool you. The IRS is not going to be duped by state-level shenanigans.

Do you need a paycheck checkup?

You can get some clarity on how tax reform will affect you by using the IRS Withholding Calculator. This nifty little tool takes you through a series of simple questions about your tax filing status, the number of jobs you have, your household income level, dependents, deductions, and so forth. The result is a report that shows how much you should withhold from each paycheck. This tool is especially helpful for families with more than one income. You can find the tool at www.irs.gov/individuals/irs-withholding-calculator.

More time to challenge

If you feel like the IRS has wrongfully seized your property, the new tax law gives you more time to challenge that action. Before the tax reform, you had 9 months to file an administrative claim or bring a civil action. Now you have 2 years. This time frame applies to situations in which the IRS has already sold the property it levied. If it still has the property, there is no time limit.

 

Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell,   2340 Garden Road Suite #202, Monterey, CA  93940 or email them to: stevemerrell@montereypw.com