Dog Days of Summer

Well, here we are again in the Arizona desert during the dog days of summer. The forecast highs in Phoenix for Sunday through Thursday this next week are 112, 115, 118, 114 and 110 degrees, respectively. The good news, if any, is that the humidity levels in the area will drop below 20% for most of that stretch. Don’t get me wrong – I understand how miserable it can be back east and down south with 90-degree temperatures and 90% humidity. Most would agree that they would prefer a dry heat rather than the extremely muggy alternative. Having experienced those conditions, I think I agree with that. Hopefully, if you live here in the Phoenix area, you have already or will soon be able to get away to cooler climes for at least a brief respite from the heat. Think of how we feel, however, in the dead of winter watching on TV as our friends in the cold climates deal with endless snow. That can make the summer heat easier to bear.

I thought I would update you on a few developments regarding the new tax law that took effect in 2018. For one, there are now four states that have brought litigation against the federal government regarding the so-called SALT (state and local tax) provision in the new law. This is the provision that caps the amount a taxpayer can claim in the tax section of schedule A, itemized deductions, to $10,000 per year. This is a big issue in high-tax states because a large portion of the tax benefit gained by having paid high property tax and income tax in a high tax state is now eliminated. The idea behind the new law is that the federal government should not be subsidizing the high tax states more than the others just because they choose to impose high taxes on their residents. The four states that have brought litigation are New York, Connecticut, Maryland and New Jersey. I would not be surprised to see some other high tax states join in this fight soon such as Illinois and California for a couple of examples.

A proposed new W-4 form has been rolled out by the IRS and there are some, including the American Institute of Certified Public Accountants (AICPA), that have voiced their opposition to the new setup on the form. The W-4 is the form a new employee fills out when beginning a new job that indicates how much in federal withholding they would like to have taken out of their wages. The AICPA argues that the new proposed form needs to be simplified as it is too cumbersome administratively for employers to deal with and that the new form requires personal and private information related to all household income and, therefore, is too invasive to an employee’s privacy. It will be interesting to see what this final form will look like for 2018.

Another notable development is the proposed 2018 form 1040 individual income tax return recently unveiled by the IRS. The main form is much shorter than in prior years (the postcard concept), but it then requires many more schedules to report the same activity that likely was reported on the 2-page form 1040 previously. It remains to be seen what the final 2018 form 1040 will look like and I’m sure there will be much debate over the logic of making the main form shorter, but at the expense of having to complete several more schedules to accomplish the same reporting goal. The new main form is only two half-pages in length.

Lastly, the IRS has promised more detail guidance by the end of this month related to the new 20% small business tax deduction for flow-through business entities such as S-corporations, partnerships and limited liability companies (LLCs). This was the bone that was thrown to the US small business owner to compare to the permanent maximum 21% granted to C-corporations in the new tax law. About 90% of US businesses are organized as pass-through entities and range in size across the board. All pass-through owners who earn less than $157,500, if single, or $315,000, if married, can deduct 20% of their business net income before figuring their individual taxable income for the year. This will be a sizeable tax break for these business owners. However, business owners in certain service industries will be limited on the deduction they can claim if their income is over these thresholds. The guidance that is forthcoming will theoretically give more clarification on which specific industries this deduction limitation will apply.

As a reminder for those who may not have yet filed their 2017 tax returns, the business extension deadline is fast approaching in just over eight weeks on September 17th and the individual tax deadline is on October 15th. We will also plan to conduct year-end tax planning interviews starting immediately after the October deadline and throughout November. Please contact us if you have any questions or would like to schedule an appointment with Mark or Andrew.

Mark J Weech, CPA