It's a dubious distinction that New Jersey's property taxes are the highest in the nation. To that end, and cognizant that state and local property tax deductions will be capped under federal law at $10,000 starting next year, New Jersey Governor Chris Christie signed an executive order on Wednesday, December 27, ordering all towns in New Jersey to allow prepayment of the first two quarters of residents’ 2018 property taxes before year end.
The Tax Cuts and Jobs Act passed recently by Congress could prove quite “taxing” for the Orthodox community here and across the state and region, but may not be cause for the panic that people are expressing, according to local tax professionals.
The new law could potentially discourage home ownership and charitable giving, and even put people off from having large families. However, according to Teaneck’s Paul Rolnick, CPA, who is president of the board of Yeshivat Frisch and a leading local accountant, most of middle class America will in fact realize tax reductions. Corporate taxes will also be reduced, and the reduction of corporate taxes could mean the reduction in the cost of goods that will be passed on to the U.S. consumer.
Regarding business deductions, in the past businesses have been able to deduct 50% of entertainment costs that are directly related to the active conduct of a business. For example, if you take a client to a baseball game after a business meeting, you can deduct 50% of the cost incurred. But under the new law, for expenses incurred after Dec. 31, 2017, there is no deduction allowed. So any entertaining of clients and business associates should be done before year-end.
The impact on our community will be felt mainly in terms of deductions. State and local tax deductions for real estate taxes will be capped at $10,000, and mortgage interest for next year will be deductible up to $750,000 instead of its current $1 million cap. This could create less of an incentive to purchase a house instead of rent, Rolnick told The Jewish Link.
Rolnick called the tax package a “mixed bag,” saying “by and large this isn’t great for the local Orthodox community. The limitation of mortgage interest deductions up to $750,000 of principal indebtedness and the elimination of home equity interest deductions will have an impact on the community.”
The interest on home equity loans will also be eliminated. The bill will preserve deductions for medical expenses for at least two years. However, the threshold has been lowered for both 2017 and 2018; rather than expenditures over 10% of income being deductible, it will now be amounts over 7 ½% of income.
Daniel Magence, CPA, Esq., who is a principal at Pristine CPA Solutions LLC in Teaneck, noted, “If you are close to the 7 ½% mark, go get that dental procedure or expensive pair of glasses to put you over the threshold and make those expenses deductible.”
The standard deduction is going to be raised from $12,700 to $24,000 for married couples. With the elimination of deduction for dependents, this pretty much means that the two major deductions left are mortgage interest and charitable contributions. But the increase of the standard deduction makes the charitable contributions prohibitive to all but the very wealthy.
The new tax code could discourage charitable giving while also decreasing the number of taxpayers who itemize, and increasing the cost of giving for those who decide to itemize.
On the positive side, the child tax credit will double, but that increase is only for children up to age 17.
Also, residents will be able to use their 529 education savings plans to pay for yeshiva or day school K through 12 tuition, up to $10,000.
“OU Advocacy and its affiliated TEACH Network is exploring ways to work in Albany, Trenton, Annapolis and other state capitals to increase the value of this contribution deduction and thus benefit our community more. (We will be in further touch about those plans and how you can join the effort in the coming weeks.),” wrote the Orthodox Union to yeshiva and day school parents.
However, for New Jersey families, this change will only be a benefit to those who have extra funds in their 529 plans as the state does not allow for deductions of 529 withdrawals.
Qualified tuition reductions, or QTRs, which act as incentives in the private school sector to allow schools to offer reduced tuition for children of teachers, have been preserved under the new law.
Still, there is an overall concern within the Orthodox world.
“As a high percentage of Orthodox Jews have large families and reside in areas that are highly taxed, these changes will likely have a dramatically negative effect on large numbers of our community,” stated Agudath Israel of America.
“By and large, I think Bergen County is a tale of two cities,” said Rolnick. “We have people doing very well and people not doing as well. Bergen County is an expensive place to live.”
With just days left in 2017, what is a taxpayer to do? Here are the following suggestions:
- Prepayment of state taxes: The new legislation makes it clear that taxpayers cannot prepay state and local income taxes. However, regarding property taxes, the deduction has been limited to $10,000 beginning in 2018, so it is important to maximize benefits this year. That said, if you are subject to alternative minimum tax (AMT) you may not benefit from the deduction. If you are holding a bill for real estate taxes due in 2018, then you may be able to prepay, and deduct, that amount in 2017, depending on your specific situation. If you have a Q4 2017 state tax payment that was otherwise due in January, you should consider paying it in December.
- Making charitable contributions by year end: Since the top income tax bracket is going down, there could be a greater benefit to you by paying and deducting contributions in 2017, as opposed to a later tax year. For example, paying next year’s synagogue dues before year end might allow you to get the benefit of the full charitable deduction. On the other hand, your effective tax rate could actually be higher next year with the loss of the state tax deduction and the increase in the standard deduction, so it might be beneficial to put off the deduction until next year.
- Remember that the standard deduction is increasing to $24,000 from $12,700: If your mortgage interest and charitable contributions (the only two remaining itemized deductions of considerable size) are less than that amount, you should consider bundling your charitable contributions into one year. One suggestion is that every other year you can pay twice the amount you had previously paid in one year, so that you exceed the standard deduction amount in order to maximize the benefit of your charitable contributions.
The most important thing to remember is not to panic. Do not believe everything you hear at shul or read on Facebook. Speak to your accountant or other tax professional and get advice relevant to your particular situation.