(Photo/Pixabay CC0)
(Photo/Pixabay CC0)

Three pieces of advice for retirees baffled by new tax bill

No one likes uncertainty, but the new tax bill promotes a lot of it. With the new year almost here, my clients want to know what they should do in the few remaining days of 2017. With passage of the tax overhaul by both the House and Senate on Dec. 20, and President Donald Trump expected to sign the bill, there will be major changes to the tax code starting next year. However, the complexities will take a while to figure out. What to do now?

First, stay informed. This column is not intended to provide tax advice, so check with your tax provider for information in real time Also, tax issues vary for every individual and family, so consulting with your financial adviser is critical going forward. And it’s worth repeating: The tax bill was passed in such haste that the IRS, as well as tax professionals, will need time to digest its provisions and for the IRS to clarify how they will apply to each of our tax liabilities.

That stated, the tax-reform proposals are so wide-ranging, we’ll focus on three matters affecting people about to retire or already retired, and California residents.


1. Increase in standard deduction and elimination of personal exemptions

The major change individuals will face is an increase in the standard deduction from $12,700 to $24,000. If your itemized deductions on Schedule A are under $24,000, there’s no benefit to filing the long form.

There is also a strong probability that the number of tax brackets will be reduced and income tax rates lowered in 2018. So, it makes sense to delay receiving income due you over the next few days to Jan. 1 and accelerate 2017 deductions, since the standard rules apply for this tax year. Here a reminder is in order: Your deductions and income are subject to the calendar year, not the April 15 tax-filing deadline. Regarding stocks and mutual funds, to settle by Dec. 31, you’ll need to trade by Tuesday, Dec. 26. If you don’t make the trade date, call your broker to request one-day settlement.


2. Limits on deductibility for state taxes

Californians face new limits on deducting state and local income and property taxes. California is one of the states dramatically affected because of our relatively high state income tax and the high value of residential real estate purchased over the last 10 years. Logically, prepaying property taxes and estimated state income-tax payments makes sense. But there’s one caveat.

Alternative Minimum Tax (AMT) liability may come into play, and prepayments represent “preference items.” This means that if you were subject to AMT last year, you will probably be subject again in 2018 unless your income and deductions change significantly. So, although you would save money on your standard federal income tax return, the AMT calculation disregards these deductions. Any reduced tax liability in the normal calculation is potentially made up in a simultaneous mandatory AMT calculation.

Will you owe AMT for 2017? Check last year’s return. Did you owe AMT in 2016? If your income and work situation has not changed, you’re likely to have AMT tax liability for 2017. Then prepaying state estimated tax and prepaying both halves of your property tax bill will not provide a benefit for you. Going forward, there is a possibility that the AMT will be eliminated or the income that qualifies you for individual AMT could rise significantly. This could affect your taxes in 2018. Again, consult your tax adviser or financial planner.


3. Retirees downsizing their homes

Finally, are you retired or near retirement and thinking of downsizing your home? Consider relocating to a state with lower state income taxes, since your ability to deduct California state income taxes is at risk. Property-tax deductions also could be held to $10,000. Add to that, mortgage interest-deductions currently can be taken on a loan up to $1 million. The cap will be lowered to $750,000 or $500,000 for loans made in 2018. In all, new limits on deducting state income taxes and property taxes makes selling your home and then renting something to strongly consider.

Also, the holding period to be eligible for a capital gain exclusion for your primary residence of $250,000 per spouse might be changing. For a retiree that benefit is really significant, so make sure to check with your financial planner in regard to that provision.

How to sum it all up? Speak with your tax adviser sooner rather than later.

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Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or ira@sasadvisors.com.