By By Charles W. Tricomi, Jr.
The financial markets in 2017 proved to be tremendously resilient, as they appeared impervious to extraneous noise and geopolitical risk while yielding larger-than-expected gains. The hastily assembled Tax Cuts and Jobs Act (TCJA) interrupted any expectation of smooth sailing into the New Year, as local residents were left scrambling to digest the new legislation by year-end.
TCJA could be a net positive for a majority of Greenwich residents, but it may take years to fully comprehend the ramifications of the bill. There are three provisions in TCJA that are worth highlighting: the cap on state and local tax (SALT) deductions; the reduction of allowable mortgage interest; and the increase in federal estate and gift-tax exemption thresholds. Together, these new limits could reduce the benefits of owning a home, especially in the Tri-State region.
The SALT deduction had been unlimited, previously, which allowed homeowners the ability to deduct the full amount of taxes paid on state income and property. The newly imposed SALT cap will adversely impact those paying high state income and property taxes, as the maximum amount couples can deduct for SALT is now capped at $10,000 (or $5,000 for single filers). In context, the 2015 average SALT deduction in Nassau County exceeded $20,000.
Fairfield County’s property taxes, while higher than the national average, are on the low-end of the spectrum relative to its metropolitan area peers.
Ari Maunula, CPA and Partner at Marcum LLP, believes that the limitation imposed by the SALT deduction cap of $10,000 may indirectly make Greenwich more attractive when compared to property taxes paid in New York. (TCJA was the hot topic of discussion at this year’s holiday parties; many expressed angst that their accountant had yet to return their call.)
Moody’s Analytics Chief Economist Mark Zandi predicts national housing prices will be 4% lower by mid-2019, due to TCJA. He further estimates that counties in New York could see prices 10% below where they would have been without the tax bill by the summer of 2019.
The governors and legislators of the high-tax paying states are looking for ways that will allow their residents to take advantage of other federal tax breaks to help restore certain TCJA deductions. Eliot Bassin, CPA and Partner with accounting firm Bregman & Company, thinks that residents will place more pressure on high tax municipalities to trim their budgets and do more with less. “How towns choose to respond to this pressure (e.g., what services they cut) may affect property values more than anything,” Bassin said.
Another key TCJA provision stipulates that home mortgage interest deduction can only be taken on mortgage debt of up to $750,000 (applies to mortgages taken after Dec. 15, 2017, while preexisting mortgages are grandfathered in). Additionally, the deduction for interest arising from home equity debt can no longer be deducted at all (no grandfather provision), which should incentivize paying down home equity debt more quickly.
Black Knight Inc. calculates that the new interest-deductibility cap would cost a homeowner with a mortgage over $750,000, an average of $2,500 to $4,000 a year depending on their tax bracket. This would equate to a 6% increase in monthly principal and interest payments for those individuals securing a new mortgage post-TCJA.
While Washington will no longer subsidize homeowners to the same degree, personal taxes are poised to rise 13% for New Yorkers and 11% for New Jersey residents, according to the Institute on Taxation and Economic Policy. This provides further justification for home buyers to relocate to lower-tax states such as Connecticut. Given its proximity to the city, its great schools, amenities, lower property and income taxes, low Mill Rate, and close-knit charming communities, Greenwich should stand to benefit from this trend.
Just like their accounting brethren, lawyers specializing in trust and estate planning should equally expect to be in high demand, even as TCJA doubles the federal exemption estate threshold. Stephen Napier, a lawyer with Ivey, Barnum & O’Mara, LLC, continues to stress the importance of estate planning, given that the Connecticut estate and gift tax exemption in 2018 is only $2.6mm per individual. This is significantly below the updated federal exclusion amount of $11 million for individuals, or $22mm for couples (when the surviving spouse elects the estate law provision called portability).
The recently signed Connecticut state budget paved the way for the exclusion threshold to eventually match the federal exemption level. However, the Connecticut bill was signed before December. Michael Clear, Partner at Wiggin and Dana LLP, thinks that only time will tell if the Connecticut’s budget will allow for the state exemption to fully match that of the federal level in 2020 (since Connecticut was expecting it to be closer to the $5 million range).
Current law resets the exemption levels back to their original form in 2026, but they could instead become permanent at a future date (similar to what happened with the Bush tax cuts).
Nonprofits have been the beneficiaries of gifts from large estates as an element of strategic tax planning. Unfortunately, local fundraising could be severely hit due to the increase in the estate and gift tax exemption levels. Greenwich nonprofits offer incredible services to our community; let’s not forget them amidst this new tax environment.
TCJA is complex and complicated. As the markets of 2017 proved their resiliency, this will be the year of individual resiliency. Keep calm and stay informed.
Charlie Tricomi is very involved in the community and is a Financial Advisor living and working in Greenwich.
