No doubt you are curious about the new tax law and the impact it will have on your personal finances. From what I hear from the accounting community, there is a lot of head-scratching going on in an attempt to figure out the implications of the TCJA for their clients. As a matter of fact, toward the end of January 2018, the American Institute of Certified Public Accountants (AICPA) sent letters to Congress, the IRS, and the Treasury Department, asking for guidance and requesting a dedicated service unit for tax practitioners.
While some aspects of the new law are still in flux, some changes are set in stone. You probably already know that tax brackets have changed for both individuals and businesses, with the most dramatic drop in tax rates occurring for businesses. Corporate tax rates will drop from 35% to 21%, and the corporate Alternative Minimum Tax (AMT) rate has been repealed. For individual taxpayers, the standard deduction will nearly double from the current $6,350 for singles and $12,700 for married, to $12,000 and $24,000 respectively. There will be a cap of $10,000 on deductions for state and local taxes (SALT), which includes State income taxes, sales tax, and property taxes. Mortgage interest deductions for new purchases initiated in 2018 will be capped at $750,000 for personal residences. And starting in 2019, the individual mandate for health care will go away, eliminating the requirement for individuals to carry health coverage or be subject to a tax penalty.
While these are the more widely known points, there are a few other changes that you may not know about. Here are 5 things you ought to know, if you don't already.
- Short-term Cuts: Tax cuts for the corporate market are deemed permanent; however, individual tax rate cuts are due to expire in 2025. The bottom line? Work with a tax advisor and/or financial advisor to get the most out of this time line. 2025 will be here before you know it.
- Mortgage Interest Deductions: The $750,000 cap on home interest deductions applies to purchases made beginning in 2018. However, if the interest on your existing loan(s) for primary or secondary homes exceeds that limit—up to the previous cap of $1,000,000—you are OK. You can refinance, with that loan balance in excess of the $750,000, and still take deductions on the interest—as long as you don't do a cash-out and refinance. If you do take cash out, then you will only be able to deduct the interest on the first $750,000. Also, effective January 1st, 2018, interest on a home equity line of credit is no longer deductible—even if combined with your first mortgage it's still below the cap of $750,000. There is no grandfathering rule.
- Alimony: If you're in the midst of planning a divorce, or contemplating one, be mindful that settlements that include alimony payments will no longer be deductible by the payer or taxable to the recipient after December 31st, 2018. In this case, there is a grandfathering rule. So for those already paying or receiving alimony by the end of 2018, the payments will still be deductible or taxable respectively.
- Thefts & Losses: Write-offs of personal losses related to theft, such as damage to your home, will no longer be deductible unless they are the result of a federally declared disaster. Under the previous law, write-offs were allowed if the losses were greater than 10% of your Adjusted Gross income (AGI).
- Got a new job? Hope it's close by and doesn't entail having to move. Under the new tax law, moving to another location for work will no longer be tax-deductible. Under the old rules, if the move was more than 50 miles from your current residence, then your moving expenses were deductible. Not anymore. So negotiate those costs with your employer up front so that you don't get stuck with a big bill—but also note that if your employer does pay moving costs, those payments will be taxable as income to you.
These are just a few of the more notable changes. There are several others, which we'll cover in some follow-up blog entries. For now, take heed and begin planning early! Working with your tax and financial advisor to start planning now for 2018 and beyond will be extremely helpful. And—oh, yeah—by the way, accounting and tax-preparation fees will no longer be tax-deductible either. (Shucks!)