Tax Attic for 9-20-18

It seems like every day we are seeing further fall-out from the passing of the Tax Cuts and Job Act of 2017.  In this instance, the TCJA limited the itemized deduction for state and local taxes.  The acronym for state and local taxes is SALT.  In 2018, the SALT deduction is limited to $10,000.  Previously, there was no limit on the deduction.  What is included in the SALT deduction?  First, all state income taxes paid are included.  Michigan currently taxes us at a rate of 4.25% but there are a substantial number of states with higher tax rates such as Illinois, New York, California, and New Jersey.  Second, all real estate property taxes paid are included no matter where the land is located and regardless if they are on a primary residence, second residence, cottage, hunting land or investment property.  Third, in Michigan, our vehicle license plates are included because Michigan’s Secretary of State charges us based on the value of the vehicle. Value makes the charge a personal property tax and, therefore, deductible.   Trailer plates are not deductible because the amount paid is based on the class of the trailer.  Boats are not deductible because the fee is based on the length of the boat. Motorcycles are not deductible because they are charged a flat fee. Fourth, a sales tax amount is deductible based on tables and the taxpayer’s income that would include sales tax paid on the purchase of a vehicle.   Adding up the state tax, real estate property tax, personal property tax and sales tax used to provide a nice deduction for quite a few taxpayers.  In 2018, that “nice deduction” will be limited to $10,000.  That still sounds like a nice deduction but let’s look at an example and see how limiting the SALT deduction might affect a Michigan resident. First, our taxpayers pay tax to Michigan of $4,000.  That would mean the income to Michigan would be just under $100,000.  Second, the taxpayers have a residence with real estate property taxes of $3,800. They also have a cottage up north on Big Star Lake with an additional $3,000 of property tax.  In addition, they own 20 acres of hunting land by Luther with property taxes of another $1,600.  Their property tax bills total up to $8,400.  Third, their license plates for their 2 cars and a truck total up to $600.  They bought the truck this year and paid $3,000 in sales tax.  Their plates and sales tax total is $3,600.  Their total potential SALT deduction without the TCJA would be $16,000.  With TCJA, their deduction is $10,000.   These clients are not going to be happy because they just lost $6,000 of deductions in a New York minute.  I’m using Michigan figures for this SALT deduction example.  Think about a New York resident.  New York income tax is easily double that of Michigan. The property tax rates are easily double as well.  The rates are higher and the property market values are higher as well.  The New York resident’s SALT amount could easily be $30,000 except that the TCJA limits the deduction, just like our Michigan resident, to $10,000. A few of the high tax states like New York have tried to come up with a solution for their residents.  New York has set up a state-run charitable entity that will accept federally-deductible charitable contributions while also giving the donor a credit of 85% that can be used to pay New York State tax.  That’s being resourceful and trying to help their residents.  However, the IRS has ruled that while the amounts donated are indeed qualifying charitable contributions, only 15% of the amount given qualifies for a deduction because the other 85% qualifies as a credit and the taxpayer is considered as receiving a benefit of that 85%.  So New York tries to check the TCJA while the IRS checkmates New York.  I’m sure this isn’t the end of these type of games.  I’m also sure the IRS is pretty darned hard to beat.  I will pass along more information as it develops.

At this month’s City Council meeting, we approved a proclamation declaring September as Museum Month.  We have one of the best museums in the state in our very own Rockford Area Museum (RAM).  It’s hard to believe that the RAM is celebrating it’s 5th year of moving into it’s current location in the municipal complex. 5 years ago, it did seem like there was quite a mountain to climb in order to relocate the museum from its long-time location down by the dam up to the previous location of the District Court.  I applaud all of those involved, including my fellow City Councilman Terry Konkle, for the hard work they did to make that move happen.  Current RAM Co-Directors, Al Pratt and Dick Johnston, are inviting everyone to a celebratory banquet at Boulder Creek on Thursday night, September 27.  The socializing starts at 6:30.  Dinner is served at 7:15.  Following dinner, Mark Randisi, the Sound of Sinatra, and Rockford’s Aces provide the entertainment.  It’s going to be a great evening to celebrate these last 5 years and set up the next many years.  I am quite sure tickets are available at the RAM.  See you there. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com