Stressed About Tax Reform?


I have been speaking with a lot of folks who are worried about how the tax law changes will affect their situation. This is causing a lot of folks to stress out a bit, so I thought I should offer a few suggestions and recommendations.

As you might have read, the bill that passed the House of Representatives did away with some long time tax deductions. Medical expenses, interest on student loans, state and local taxes (including income and property), casualty losses and certain other expenses will no longer be deductible.

Wondering What it is Going to Mean for You?

The “exchange” for losing those deductions is a doubling of the standard deduction to $24,000, which should actually help some folks reduce their tax burden, especially if they don’t own a home. The flip side is the elimination of the personal exemption, which kind of wipes that out for many.

Home Owners: In addition, home mortgage interest deduction will be capped at $500,000, down from the current limit of $1.1 million. Also, the every 2 year rule allowing someone to sell their principal residence and collect $250,000 ($500,000 for married owners) in capital gains on their appreciation will be changed to every 5 years and you must have lived in the home 5 of the previous 8 years instead of the current 2 out of 5 years.

$1 Million Earners: If you earn over $1m per year, this bill has very good news for you. The top tax bracket doesn’t kick in until $1m in annual income, which means a big savings on the amount up to that. Also, if you pay the Alternative Minimum Tax, you won’t have to worry about that any more, it is repealed. And if your estate is over $5.5 million ($11 million if you are married) then you will save big time as there will be no estate tax (if you are worth less than those numbers, you didn’t have to pay anyway).

So What’s the Problem With That?

The problem with this is that every time this gets repealed, instead of about 5,000 people in the country paying estate tax, everyone who dies gets taxed instead. See, today when you die, your heirs enjoy something called a “step up in basis” on any appreciated property like stocks, real estate, collectibles, etc.


The reason is that most folks don’t keep their receipts, so it is easier for the heirs to be able to determine their cost basis as of the date of death (or the alternative valuation date) so that when the asset is sold, you know how much gain to pay tax on. Without that, you must figure out what someone paid for the asset originally.

Think of it this way, if you bought your house 30 years ago for $50,000 and sell it today for $300,000, your heirs would be able to sell the house and not pay tax except the amount of appreciation that occurred after the step up date. The new legislation does not address this, but in the past when the estate tax was repealed, the heirs in this example would be paying $50,000 in federal capital gains taxes in addition to any state tax that might be due.

Self Employed Business Owners: There are a number of other provisions in this bill, most of which reduce corporate taxes dramatically. This may open some planning options for self employed and business owners. My taxes will likely go down as a result of this because I am a business owner. You may want to create a little business for yourself if you don’t already have one.

Also, as written, there will be automatic cuts to many government programs like Medicare, due to the large increase in the deficit this will cause, triggering automatic “pay go” cuts to nearly everything not called social security and defense.

In addition, there are deadlines to passing any tax reform under the rules congress is trying to operate under so that they only need 51 votes instead of 60 in the senate to pass the legislation. Because of this, if passed, the law will have to sunset in 10 years at which time everything will revert to where it is today!! Do you have a headache yet?

I’m Worried

worriedIf you are worried, I encourage you to watch and wait. This bill is far from what it will look like when passed, if it ever passes. There is much resistance to it already in both parties. Given what has happened with other legislation that has passed the house during this congress, I would encourage you to relax and wait and see.

You don’t want to go make a bunch of moves based on what is currently known as it may be very costly in the long run.

Home Buyers and Owners: Do This

If you are looking to buy, upgrade or repair a home that is your primary residence, you may want to consider refinancing your mortgage. This is because the House bill allows mortgages over $500,000 to be “grandfathered in” so you can deduct interest on up to $1.1m as long as the mortgage is structured to conform to tax law and the mortgage was in place prior to this law taking effect.

Stay Calm

In conclusion, stay calm. Congress loves to get us upset and running around racked with worry and stress. For most of us there is only so much that can be done.

If you would like to discuss whether it makes sense to refinance or otherwise reorganize financing on your primary residence, give me a call. There is a lot of nuance to doing it properly and passing an audit if you ever have one. Or if you want to look at a business you own or are thinking of starting, let’s talk. You can call the office at 415-331-9030 and Kai will be able to help you with scheduling.