Mo Vidwans
Most of us have heard of Tax Cuts and Jobs Act (TCJA), the new tax law passed by Congress and President Trump late last year and one that went into full effect at the beginning of 2018. It was wrapped up in such a big frenzy that it was probably one of the fastest actions our legislative body has ever taken. But with the speed comes peril; there are many questions still not quite answered and many issues not quite vetted out and still many concerns IRS is feverishly working on before they face the music early next year when the tax season starts. At the moment, as of this writing, even the new tax forms (1040, schedule A, B, C etc.) are in the draft form and not yet released.
Those concerns notwithstanding, let us look at what is different in the new law and how it will affect us overall.
Everyone has heard about the Standard Deduction going up (it was tooted so much in the media by the current Govt.), in fact almost doubling for all: single, married filing jointly and for heads of the households. It has increased to $12,000, $24,000, and $18,000 respectively. Folks age 65 or up and blind people get $1,250 more per person. This is all good news. But what we don’t hear much about, unless we dig in deeper, is the fact that the personal exemptions ($4,050 per taxpayer and dependent last year) are completely repealed. Because of this new set-up, generally, those who were not itemizing before will not see much change in taxes, unless you had a large family, and those who were itemizing and cannot itemize any more will pay more taxes in general; not much more but it will be noticeable. This is not something anyone wanted to hear. In the past IRS had estimated that about 30-35 million people/families itemized on their tax returns. That number, it is expected, will dwindle now to about 10 million.
TCJA also pares back or axes many deductions claimed by individuals. Here are some of the most common examples. Home mortgages are affected. Mortgage interest payments can be deducted on up to $750,000 of new acquisition debt on a primary or second residence (down from $1 million). The new limit generally applies to mortgage debt incurred after December 14, 2017. Older loans are grandfathered into the new law.
You may not be aware of the home equity loan rule changes. Before we could borrow upon our home equity, assuming there is enough equity built into our home, and claim all the interest paid on such loans. This is not the case anymore, unless that loan is actually used for building or adding on the home. So, if you were thinking of borrowing to pay for vacation or buy a car or a boat or for children’s education you can still do that, but cannot claim the interest on that loan when you itemize.
The popular deduction for state and local taxes is being squeezed. Now you can deduct any combination of residential property taxes and state income or sales taxes up to a cap of $10,000 for a residential property. Exception: property taxes remain fully deductible for taxpayers in a business or for-profit activity or taxes paid on rental realty can be taken in full on schedule E. If you are surmising from this, and there are plenty more examples, that the tax laws are bent favorably towards the small businesses, your guess is right. I could point this out with some other examples, too.
The medical expense deduction is preserved and actually enhanced just for one more year. Not only did lawmakers opt to keep this popular write-off but they have also temporarily lowered the AGI threshold for deducting the 2018 medical expenses on schedule A to 7.5 percent. Normally this threshold would have gone to 10 percent this year.
The charitable contribution write-off survived and was actually enhanced a bit. The AGI limitation on cash donations to qualified charities is hiked to 60 percent from 50 percent but I think this will change to all donations and not just cash donations. In the haste of getting the law passed congress did not vet this out properly.
Several other write-offs are eliminated; basically, everything on the itemized form which had a 2 percent-of-AGI threshold is gone and not deductible any more. That includes employee business expenses, brokerage and IRA fees, hobby expenses, tax return preparation fees, safe deposit box fees, theft losses and many more.
Others that are affected:
• Deductions for job-related moves except for military.
• Alimony for post 2018 divorce decrees.
• Personal casualty losses excluding those declared in Presidentially declared disaster areas.
The tax law keeps seven tax brackets but with different rates and breakpoints. For example: the top individual tax rate is lowered from 39.6 percent to 37 percent and that rate kicks in at a higher income level. Also note that whatever new bracket you fall into, more of your taxable income will be hit with the slightly lower rates than before.
Tax rates on long-term capital gains and qualified dividends do not change but Congress decided to set the income thresholds differently. The 0% rate will continue to apply for married tax filers up to $77,200 and 20 percent starts at $479,000; the 15 percent rate will apply to filers between these breakpoints. You can see which class of taxpayers this will benefit the most.
If you get the impression that Congress has not left much for the middle-class taxpayers to take advantage of for reducing the taxes legally, you are absolutely right. However, there are still some things we can do.
The most obvious thing is to try to bunch the itemized deductions for one year and then just taking the standard deduction the next. The idea is to try to exceed your standard deduction for one year and then go for just the standard deduction the next year. We will look at how to reduce taxes legally given this new environment in the near future.
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Mo Vidwans is an independent, board-certified financial planner. For details visit www.vidwansfinancial.com, call +1 (984) 888-0355 or write to [email protected].
