Tax Cuts and Jobs Act

Congress has just passed a major new tax law, the Tax Cuts and Jobs Act.  This law will change a lot of things mostly starting on January 2018.

This page is meant to be a quick reference site for clients (and others) to refer to about what’s real versus what’s rumor.  What should you do NOW before December 31, 2017 if things are expiring.  The point of this page and my website is to dispassionately dispense tax advice in regards to what the law is.

Since the law will be REPEALING a lot of thing starting in January, 2018, there may be some things that everyone wants to do between now and December 31, 2017.





A lot of taxpayers (and their tax advisors) are racing trying to figure out what to do now that the tax act has passed Congress.    One of the most frequent pieces of advice given is that taxpayers should “pre-pay their real estate taxes for 2018 before December 31, 2017” to get the tax deduction on their 2017 taxes.

I am advising a far simpler strategy.  Just pre-pay one month’s mortgage.

There are a couple of problems with prepaying your real estate taxes.  First off, many taxpayer will still be subject to Alternative Minimum Tax (“AMT”) in 2017.    Without going into the details, if a taxpayer is subject to AMT, prepaying real estate taxes in 2017, won’t make a bit of difference.

How can you know if you are subject to AMT?  Look on your 2016 taxes, if there’s a number on Line 45 of Form 1040, you were subject to AMT and most likely will be again in 2017. You can just save the trip to your City or Town Hall to pre-pay those 2018 taxes.

But might such a taxpayer not be subject to AMT in 2017?  Possibly, and pre-paying won’t hurt, and it could help, but if you pay real estate taxes via a mortgage escrow, this can complicate things with your mortgage company.  You will then have to sort this out with your mortgage company who will likely either still send in the real estate tax payment anyway creating a refund situation at your city hall or they won’t send it in which creates an “overage” in your escrow account, and you must determine how to get the money back.  “If you pay your real estate taxes via your mortgage company, there’s a good chance that pre-paying them may be more hassle than it’s worth. But perhaps you’re the kind of person that likes to spend an hour or two on the phone waiting on hold and talking to strangers!

Instead, I am recommending a simple alternative–pay the mortgage payment that is due on January 1st in late December, making sure the mortgage company actually has it posted before the end of December.  Don’t just mail it in.  Why do this?  Because the January 1st payment is really paying December interest, Thus, people can pay thirteen months of interest in 2017.  Note you can only pay January’s payment,  not February’s or March’s, etc.

Why is this good idea?  Doesn’t this just mean you’d only have eleven months of interest in 2018?  Well, under the new tax law, many taxpayers will never be itemizing again!  Do you want to see if you are one of those taxpayers?  Once again, refer back to the 2016 Form 1040.  Look at the Schedule A.   You need to understand that in any given year, you either itemize on Schedule A OR they take the standard deduction–whichever is higher.  For 2018, the standard deduction has been dramatically raised from $12,600 to $24,000 if you are Married Filing Jointly.

Here’s an example of one of my clients who are upper middle income to make my point. (See the attachments Schedule A 2016 and Schedule-A-The way it will look in 2018)   In 2016, this client had approximately $38,000 of itemized deductions (see line 29 of Schedule A).  The taxpayers are married filing jointly and the new standard deduction is $24,000 and $38,000 is more than $24,000 so one would assume they still be itemizing in 2018, right?  Well, not so fast.  Look at line 9 of Schedule A.  On the tax return, the number was $26,200, but in 2018 taxes, it will be limited to $10,000.  This means the total itemized deductions on this return would be around $22,000 (all things being equal) and the taxpayers will be taking the standard deduction since the $24,000 standard is more than $22,000.  Thus,  get that mortgage interest in 2017.  In 2018, it would be wasted.

So, getting your January 1st mortgage payment in so it’s posted and on the books a few days before December 31 is probably one safe strategy that many taxpayers can make use of that will work for this tax season, and it won’t mess up your escrow payments, and mortgage interest is typically not an issue with AMT.  If you still want to pre-pay your real estate taxes, you still can, and there’s no reason, you can try both strategies.

One Response to Tax Cuts and Jobs Act

  1. Carol Walker says:

    Extremely helpful! Thank you Charles

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