February 1, 2018
On December 22, 2017, the US Congress passed the Tax Cuts and Jobs Act, which effectively cut individual, corporate and estate tax rates. It is the most sweeping overhaul of tax laws in 30 years. The primary focus of the law was to lower domestic corporate tax rates with the intent that tax savings would stimulate the economy and be a precursor to increased new job creation.
The bill is over 500 pages in length and will have extensive impacts on taxpayers over, at least, the next 10 years. Some of the new provisions are permanent in nature, while other ones “sunset” after 12/31/25 and revert back to what the law was in 2017. The bill was passed by Congress within a very narrow period of time, with parts of the bill not fully detailing how the new law will or should be interpreted for the varying fact patterns of the country’s diverse set of taxpayers.
This has led to a lot of confusion on the part of both consumers and accountants. It is expected that the IRS will be issuing clarifications for many of the provisions over the coming months. In the meantime, our team of tax professionals at Shapiro Financial Security Group have been attending educational seminars to learn more about the tax act, and how we can incorporate the changes into our 2018 tax planning process that will be part of this year’s tax preparation services.
In an effort to clarify some of the key provisions of the Act, we intend to issue a series of articles over the next few months with each one focusing on a different section of the bill & how it might impact our clients. This month we will focus on those provisions and changes that will affect homeowners.
The Act affects:
- Mortgage interest deductions
- State and local tax deductions
- Property tax deductions
- Home equity deductions
- The ability to itemize and deduct property damages in the case of incidents that damage the home such as fire or flood.
- Moving Expense Deductions
- Miscellaneous Expenses
Due to the limitation of a number of itemized deductions, it is quite possible that for some homeowners, the net after-tax housing costs will increase under the new law, and renting may become a relatively more attractive financial option. ‘How exactly the tax overhaul will affect you and your housing options will depend on where you live, how much you spent (or can spend) on your home and how much the bill decreases (or increases) your overall tax burden.’[i]
Property Tax/ State and Local Tax Deductions
- The former tax law allowed qualifying taxpayers to reduce their taxable income by itemizing the total amount of property taxes they paid. It was also possible to deduct state and local income taxes (SALT) or sales taxes paid.
- The new law bundles all these so-called "SALT" taxes together and limits the deduction, in total, to $10,000 for both individuals and married couples. For some homeowners in high-tax areas such as New York, New Jersey, Connecticut, Maryland and California, $10,000 will not cover their combined property and income tax bills.[ii]
The Mortgage Interest Deduction
- If you buy a home between now and 2026, you will be able to deduct the interest as an itemized deduction on up to $750,000 / $375,000 in mortgage debt used to purchase or improve the property. This cap affects home purchases made after December 14, 2017.[iii] There is an exemption for home buyers who are under contract to purchase by December 15, 2017 and were scheduled to close by January 1, 2018 and will actually close by April 1, 2018.[iv]
- Another exception: Interest on mortgage related debt that was outstanding at 12/31/17 will be grandfathered and continue to be deductible. In addition, if you refinance an existing mortgage, the bill treats the new loan as if it were originated on the old loan’s date. That means the old limit of $1 million/ $500.000 would apply as long as you do not increase the amount of the loan over what the outstanding amount of original mortgage had been.[v]
The Home Equity Deduction
- With the prior law, interest on up to $100,000 in home “equity indebtedness” was deductible without having to trace where you spent the loan proceeds. Any of these funds used to improve the home was treated as “acquisition indebtedness” and deductible regardless if it exceeded the $100,000 threshold.
- The new legislation eliminates the deduction for new home “equity indebtedness” taken out in 2018, but grandfather’s the deductibility of interest on existing loans outstanding at 12/31/17.
- In 2026 the law will revert to its prior state, with interest on up to $1.1 million in mortgage and home equity debt again deductible.
Casualty and Theft Losses
Moving Expense Deductions
- Under the tax law in effect for 2017, a group of miscellaneous expenses that include unreimbursed business expenses, tax preparation fees, investment related expenses, and job search expenses were deductible to the extent the total amount of these expenses exceeded 2% of your “Adjusted Gross Income”.
- Starting for calendar year 2018, all of these expenses are now fully disallowed
Please give us a call at 732-739-8991 if you have questions or concerns about how these changes and how they will impact your individual tax planning issues and your tax return.
[i] “How the New Tax Law Will Impact your Housing Costs”; Samantha Sharf; Forbes Magazine; January 9, 2018; [ii] “6 Ways the Tax Plan Could Change Home Ownership”; Holden Lewis; NerdWallet.com; [iii] “How the New Tax Law Will Impact your Housing Costs”; Samantha Sharf; Forbes Magazine; January 9, 2018; [iv] “6 Ways the Tax Plan Could Change Home Ownership”; Holden Lewis; NerdWallet.com; [v] “6 Ways the Tax Plan Could Change Home Ownership”; Holden Lewis; NerdWallet.com; General References: Congressional Bill – Tax Cuts and Jobs Act of 2018: “Tax Cuts and Jobs Act”; Broadridge Investor Communications Solutions, Inc.; December 22, 2017