While I am an elder care and estate planning lawyer in Chester County and Montgomery County, PA, I need to have some understanding of the tax code because it affects planning for my clients. Tax day is just weeks away.
For those who have not yet filed (due to busyness, fear, procrastination, or the hope that Uncle Sam will not notice your 11 years of unfiled returns, etc.), I am not a CPA or tax expert, but I can share some thoughts that may help the process more understandable (or make you want to move to Malta).
1. The new tax law.
This new law affected everyone differently. For some, it was a modest tax cut. For others, it was a modest increase. And for some, it had no significant effect whatsoever.
2. SALT (State and Local Income Tax Deduction).
Under the old federal tax law, state and local taxes (income, real estate, etc.) were deductible on the federal return with no limits. For many in the middle (family income of $75k-$200k in our region), however, the SALT cap will be a pain. PA is not considered a high-income tax state, but NJ and NY are.
However, some areas have high property taxes (we are looking at you Wallingford/Swarthmore school district in Delaware County and Cheltenham School district in Montgomery County). For people who have a mid-tier home in those areas and upper middle-class income, you may lose under the new law due to the new SALT cap on deductions of $10,000.00. And if you live in NJ, the damage will be worse.
3. Larger standard deduction and lower rates.
For people in more modest brackets or who do not have a lot of itemized deductions, the new law increases the standard deduction. So if you don’t own a home or live in a low tax district (think King of Prussia. Yes, the Cheesecake Factory and low taxes — Nirvana!), your taxes may drop noticeably. Also, the overall graduated tax rates are lower, so depending on your other state deductions, the lower overall tax rates may offset any increase from the cap on state and local taxes.
If you have kids, you can no longer claim the $4000 deduction for each dependent. However, the Child Tax Credit (more valuable than a deduction) has doubled to $2000 per child, and the income at which that credit phases out has increased to $400,000 from $110,000. So, as the old saying goes, your experience may vary. They reduced the child’s age to take the credit to 16 but provide another credit of $500 for any dependent who does not qualify for other credits.
There is not a huge effect one way or the other for retirees. One notable result was only for tax year 2018. In 2018, the threshold for medical expense deductions was reduced from 10% of adjusted gross income to 7.5%, but for 2019 it is back to 10%. You may want to bundle high-cost medical care into one calendar year so that you meet the threshold. This refers to elective medical care. Obviously, it is a good idea to address emergent issues to avoid, like, dying.
6. Self-employed people (except certain professions, like lawyers, who were not helped by the law).
For those who are owners of a qualified business interest, they can deduct 20% of qualified business income. This is available to those who also can take the standard deduction. Individuals in higher brackets will benefit more.
So buck up and get moving. April 15 is just around the corner!
For more information, or to schedule a consultation with the trusted estate administration lawyer in Chester County and Montgomery County, PA, contact Slutsky Elder Law today at (610) 940-0650.