How Taxpayers Can Plan for Tax Changes

Summary

Podcast Summary: WSJ Your Money Briefing

Episode: How Taxpayers Can Plan for Tax Changes

Date: November 13, 2017
Host: Charlie Turner
Guest: Laura Saunders, Wall Street Journal Reporter

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Episode Overview

This episode focuses on what taxpayers can do to prepare for the significant potential changes to the U.S. tax code, as House and Senate Republicans develop competing bills aimed at a sweeping tax overhaul. While the final outcome is uncertain, finance reporter Laura Saunders breaks down similarities and important distinctions between the proposals, offering timely, actionable advice for year-end tax planning amidst unprecedented uncertainty.

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Key Discussion Points & Insights

1. Themes Shared Across the Tax Bills (01:27)

• Both House and Senate bills:
  • Reduce tax breaks for homeowners (especially mortgage interest and state/local tax deductions)
  • Eliminate the personal exemption and the alternative minimum tax (AMT)
  • Expand child tax credits and double the estate tax exemption, offering significant benefits to wealthy taxpayers
  • Give more favorable treatment to pass-through business income vs. wages—a "historic change"
• Quote:
  "They would give homeowners fewer tax breaks... no deduction for most state taxes... harder to take many deductions, particularly your charitable ones... There would be no personal exemption and no alternative minimum tax. Even Congress is sick of that one."
  — Laura Saunders (01:27)

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2. Planning for Homeowners and Real Estate (02:41)

• Mortgage Interest Deduction:
  • House bill: Deduction limited to mortgages up to $500,000; eliminates deductions for second homes
  • Senate bill: Largely maintains current rules
• Capital Gains on Home Sales:
  • Current $500,000 exclusion could be restricted next year; sellers should try to close by year-end
• Quote:
  "If you're selling a home, then try to do it by the end of the year if you want to use the very popular tax break that lets you be exempt on $500,000 worth of profits."
  — Laura Saunders (03:12)

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3. Pass-Through Business Income (03:23)

• Treatment of income passed from businesses to owners differs between bills
• Taxpayers may want to consider deferring or accelerating income depending on final bill details
• Quote:
  "Based on the details of what they do, you might either want to defer income into next year or accelerate it into this year."
  — Laura Saunders (03:47)

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4. State and Local Tax Deductions (04:06)

• House bill repeals deduction for state/local income and sales taxes, caps property tax deduction at $10,000
• Senate bill repeals all property tax deductions
• States hit hardest: high-tax states like California, New York, New Jersey, and Texas (due to high property taxes)
• Suggestion: Prepay state taxes in 2017 if possible for deduction
• Quote:
  "You might want to accelerate some state taxes, prepay them this year so you'll still, if you can still get a deduction and avoid the AMT."
  — Laura Saunders (04:27)

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5. Charitable Donations (04:42)

• Bunching charitable giving in 2017 could help, given the possible doubling of the standard deduction
• Consider donor-advised funds to maximize the strategic timing of deductions
• Quote:
  "Maybe you want to bunch a bunch of deductions or push them into this year... look into having a donor advised fund—that's where you can bunch deductions and make a whole bunch in one year and then give the money to donors when you feel like it later on."
  — Laura Saunders (04:48)

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6. Electric Vehicle Tax Credits (05:24)

• House bill repeals the $7,500 electric vehicle (EV) credit
• Those planning to buy an EV should consider finalizing the purchase before year-end
• Quote:
  "The House bill repeals the tax credits... up to $7,500... to be safe, you might want to finish that purchase before the beginning of next year."
  — Laura Saunders (05:41)

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7. Medical Expense Deduction (06:04)

• House bill eliminates this deduction, but the Senate retains it
• Those with major medical expenses should not attempt to accelerate payments into 2017, as the law and the IRS may not allow it
• Quote:
  "Don't think you can accelerate those expenses into 2017 because the law is against you there and the IRS could disagree."
  — Laura Saunders (06:19)

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8. Employee Stock Options (06:43)

• The potential repeal of the AMT may affect the timing of exercising incentive stock options (ISOs)
• Waiting until next year could benefit those affected
• Quote:
  "If you have ISOs, so called incentive stock options, those can be a trigger for the alternative minimum tax. But that may go away next year."
  — Laura Saunders (06:51)

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9. Alimony Agreements (07:05)

• House bill eliminates alimony deductibility for new divorce agreements in 2018; Senate bill does not
• Those close to finalizing divorces should try to do so before year-end to preserve the deduction
• Quote:
  "If you have a high bracket taxpayer paying alimony to a low bracket taxpayer, it could be tens of thousands of dollars. So try to get that divorce finished."
  — Laura Saunders (07:31)
• Memorable Moment:
  "We hear that the phones have been ringing off the hook for the divorce lawyers."
  — Laura Saunders (07:46)

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10. General Uncertainty and Final Advice (07:52)

• With no bill yet passed, taxpayers have very little time and must act quickly as soon as changes are finalized
• Quote:
  "It's close to the end of the year and you've got to make your moves. But keep an eye on what's going on and try to get your ducks in a row and get set up to move quickly if you need to."
  — Laura Saunders (08:00)

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Notable Quotes and Timestamps

• "They would give homeowners fewer tax breaks... no deduction for most state taxes... harder to take many deductions, particularly your charitable ones..."
  — Laura Saunders (01:27)

• "If you're selling a home, then try to do it by the end of the year if you want to use the very popular tax break that lets you be exempt on $500,000 worth of profits."
  — Laura Saunders (03:12)

• "You might want to accelerate some state taxes, prepay them this year so you'll still, if you can still get a deduction and avoid the AMT."
  — Laura Saunders (04:27)

• "Look into having a donor advised fund—that's where you can bunch deductions and make a whole bunch in one year and then give the money to donors when you feel like it later on."
  — Laura Saunders (04:48)

• "The House bill repeals the tax credits... up to $7,500... to be safe, you might want to finish that purchase before the beginning of next year."
  — Laura Saunders (05:41)

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Important Timestamps

• Tax themes and similarities: 01:27
• Homeowners and real estate: 02:41
• Pass-through income: 03:23
• State and local tax deductions: 04:06
• Charitable donations/donor advised funds: 04:42
• Electric vehicle credits: 05:24
• Medical expenses: 06:04
• Stock options: 06:43
• Alimony: 07:05
• Final uncertainty and year-end urgency: 07:52

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Tone and Style

The conversation is clear, direct, and practical, with a sense of urgency underscored by the rapidly approaching year-end and unresolved legislation. Laura Saunders delivers sincere, actionable guidance while acknowledging the uncertainty of the outcomes, offering taxpayers strategies to minimize risk and maximize available deductions while time permits.

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This summary encapsulates the essential points and guidance offered for listeners seeking to navigate impending tax changes and make informed financial choices before the end of the year, as highlighted in this Wall Street Journal personal finance episode.

Transcript

[Laura Saunders]

Access to affordable credit helps me pay

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my employees, but I don't really need it.

[Laura Saunders]

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[Charlie Turner]

they need while increasing megastore profits.

[Laura Saunders]

They deserve it, don't they?

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Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition. This is yous Money Matters from the Wall Street Journal.

[Charlie Turner]

Welcome to youo Money Matters. I'm Charlie Turner in New York. GOP leaders in the House and Senate have released different plans to overhaul the tax code with plans to reconcile the measures and hopefully pass a tax reform bill by year's end. There are a lot of differences between the two proposals and as a result, an exact outcome is tough to predict. What's clear is that the timetable will probably consumers with little time to do year end tax planning. Joining us is Wall Street Journal reporter Laura Saunders. Laura, even though we've talked about differences, they've been broadcast on whatever news outlet you can imagine, there are similarities between the two tax measures that might make it a little easier to suggest to taxpayers what they can do to plan for next year. So why don't you talk about that, Some of the similarities?

[Laura Saunders]

Yes. Well, we don't know the details and so and those are very important for actions. But what strike is that despite the differences between these two bills, significant differences, they have broad themes in common. They would give homeowners fewer tax breaks. There would be no deduction for most state taxes, especially state income taxes. It would be harder to take many deductions, particularly your charitable ones. You wouldn't need to. There would be no personal exemption and no alternative minimum tax. Even Congress is sick of that one. And then they would both bills would expand credits for children. They would double the estate tax exemption so that very wealthy people would benefit even more. And here's the really key difference. Business owners would get a tax break, but wage earners would not get the same tax break. So the business owners would be at an advantage over wage earners, the people making the same amount of net income. And that's really a historic change in the code. It's meant to stimulate economy. I don't know. But what will happen? But that's what they mean to do.

[Charlie Turner]

Well, why don't we start with regular taxpayers, you know, people who own homes, who want to buy a home or sell a home. What should they plan for?

[Laura Saunders]

Well, they should be careful because the Senate bill has pretty much the same breaks we have now. But the House bill says you can only deduct interest on a $500,000 mortgage. And also the House bill seems to take away all deductions for second homes. So that's really important. And if you're selling a home, then try to do it by the end of the year if you want to use the very popular tax break that lets you be exempt on $500,000 worth of profits. And that's because it will be restricted next year.

[Charlie Turner]

All right, turning to pass through income, this has been talked about as well. This is income, I believe, that's passed through businesses to their owners and it's taxed at the individual level. What should people know about so that they can prepare?

[Laura Saunders]

Well, the important thing there is that this income is being favored, but it's favored differently in the House and the Senate. So really you just have to stay tuned and based on the details of what they do, you might either want to defer income into next year or accelerate it into this year.

[Charlie Turner]

Laura, let's talk about state taxes also another hot topic. The House bill repeals the deduction for state and local income and sales taxes, caps the deduction for property taxes at 10,000. The Senate bill repeals deductions for property taxes and in addition to repealing the

[Laura Saunders]

others, I think the thing there is that, is that they are very serious about this and that's going to hurt a bunch of states, high tax states a lot, put a lot of pressure on them. They're the states you probably would think of like California, New York, New Jersey. But Texas has very high property taxes. We'll see what happens there, what they agree on and not you might want to accelerate some state taxes, prepay them this year so you'll still, if you can still get a deduction and avoid the Amtrak.

[Charlie Turner]

Texas, huh? Okay.

[Laura Saunders]

Texas has high property taxes.

[Charlie Turner]

Interesting. Okay.

[Laura Saunders]

They don't have an income tax so they have to rely on the property taxes.

[Charlie Turner]

Right. Laura, what should people who write off charitable donations be thinking about in light of these two measures?

[Laura Saunders]

Well, this is important because if you only give a fairly small percentage of your of your income, maybe you want to bunch a bunch of deductions or push them into this year because next year you may not, it may not be worth it to break those out and write them off separately because they want to double the so called standard deduction. And this is a good time for people to look into having a donor advised fund that's where you can bunch deductions and make a whole bunch in one year and then give the money to donors when you feel like it later on. We've written some good stories about this. But remember, donor advised fund.

[Charlie Turner]

I'm speaking with Laura Saunders of the Wall Street Journal. You're listening to youo Money Matters. Thanks for listening everyone. Laura, let's talk about cars. You know, Tesla, the Chevy Volt. You write that if someone buys an electric vehicle, it had better be su.

[Laura Saunders]

Yeah, well, I would do it soon. The House bill repeals the tax credits. It's a big tax credit, $7,500 up to. And they repeal it for those plug in electric cars, the heavy ones like Tesla or Chevy Bolt. So we don't know it's not in the Senate bill. We don't know if it's going to happen. But to be safe, you might want to finish that purchase before the beginning of next year.

[Charlie Turner]

Turning to medical expense deductions, you write that it may not be such a good idea to prepay 2018 medical expenses.

[Laura Saunders]

Well, this is a very sore subject because this is the one thatmost people don't ever get this deduction. But people in really dire situations, people with nursing home expenses, dementia care, things like that, they write off large parts of their income are spent on these expenses and they. And under the House bill, they couldn't be deducted anymore. The Senate says yes, they could be deducted. And so you need to watch what's happening, but don't think you can accelerate those expenses into 2017 because the law is against you there and the IRS could disagree. Allow them all.

[Charlie Turner]

All right. You also have a suggestion about how workers should handle employee stock options.

[Laura Saunders]

Well, yes, and if you have ISOs, so called incentive stock options, those can be a trigger for the alternative minimum tax. But that may go away next year. So maybe you want to wait to exercise those options till next year, just see what happens.

[Charlie Turner]

Finally, you mentioned alimony. You suggest people sign divorce or separation agreements that include alimony before the end of this year. And in the House bill, alim ceases to be deductible by the payer next year.

[Laura Saunders]

Right. Under current law, the payer deducts it and the recipient it's income for them. But the House bill would change this. The Senate bill would not. But this is, it would change it for divorces that are finalized after 2017. And so that can make a big difference. If you have a high bracket taxpayer paying alimony to a low bracket taxpayer, it could be, you know, tens of thousands of dollars. So try to get that divorce finished. And we hear that the phones have been ringing off the hook for the divorce lawyers.

[Charlie Turner]

These are all great suggestions, but isn't everybody at a disadvantage because no bill passage is in sight and people have the matter of a few weeks?

[Laura Saunders]

That's right. It's close to the end of the year and you've got to make your moves. But keep an eye on what's going on and try to get your ducks in a row and get set up to move quickly if you need to.

[Charlie Turner]

Wall Street Journal reporter Laura Saunders. Laura, thank you very much for joining us.

[Laura Saunders]

Okay, thank you.

[Charlie Turner]

And that's your Money matters. I'm Charlie Turner at the Wall Street Journal.

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