Mar 20, 2018 5 min read

By Joseph Maker, CPA

Manager – Wealth Planning at Waldron Private Wealth

Throughout the course of the last 12 months, we have heard an awful lot about the GOP tax reform bill, The Tax Cuts and Jobs Act of 2017, which was eventually signed into law on Dec. 22. The Internal Revenue Service is still working through the tax code integration of the new bill, but some elements have already been enacted. For instance, if you are currently working, you most likely noticed a moderate increase in your paycheck starting in February. This occurred as a result of an update to the federal withholding table, which was part of the bill. The updated table is fairly straight forward, but if you are self-employed and estimate your own withholding tax, you will want to take a close look to make sure you’re withholding enough to avoid getting a bill in 2019.

A complete and final set of regulations has not yet been published, and we will not know the full impact of the bill until that happens. In the meantime, the IRS continues to disseminate news releases piecemeal, advising taxpayers as official determinations are made.

Based on what has been released to date, we have identified three aspects of the new tax bill that you may want to discuss with your accountant.

1. Itemized deductions

Historically, taxpayers have used itemized deductions, like mortgage interest, property taxes, state and local tax, and charitable contributions, to reduce their taxable income. The new tax law eliminates or reduces many of these deductions. For example, prior to the new law, unreimbursed medical expenses exceeding 10 percent of a tax filer’s adjusted gross income could be deducted from their taxable income; that threshold has now been reduced to 7.5 percent. Under the new tax law, the deduction for all state and local taxes (SALT) cannot exceed $10,000, so taxpayers in high-tax states will likely see their SALT deduction reduced significantly going forward. And miscellaneous itemized deductions, such as tax preparation fees, investment fees, moving expenses and employee expenses, will be eliminated for tax years 2018 -2025.

To counteract the impact of the changes to itemized deductions, beginning in 2018, the standard deduction will increase, from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married couples. The standard deduction works in the same way as the itemized deduction, in that it reduces your taxable income. The challenge will be to evaluate how your itemized deductions perform in the new tax landscape, compared to the results you would achieve using the new standard deduction. The IRS has published a deduction overview page, which may be a useful resource.

2. Home equity lines of credit and mortgage interest deduction cap

If you have a home equity loan, the interest remains deductible under the new tax law so long as the loan was taken out to buy, build or substantially improve your home. However, there is now a significant change to how home equity interest is treated. If you took out a loan to pay off a credit card or to buy a car, the interest on that debt is no longer deductible. In addition, for home equity loan interest to be deductible under the new plan, the loan must be secured by the taxpayer’s primary or secondary home, it cannot exceed the cost of the home, and may be required to meet other requirements as well. The cap on mortgage debt has also changed. Previously, you could deduct the interest on a home mortgage of up to $1 million and a home equity loan up to $100,000, for married couples, totaling $1.1 million. Now, for mortgage debt incurred after Dec. 14, 2017, the cap has been reduced to $750,000. This change applies to a single residence or could include the mortgages of an individual’s primary and second homes. The IRS has provided examples of how the new rules work to help clarify.

3. Child tax credit

Some impactful changes were also made to the child tax credit, perhaps most notably, that it will increase from $1,000 to $2,000 per child in 2018. Additionally, up to $1,400 for each child can potentially be refunded. This is significant, as previously, the child tax credit was simply a reduction of your tax liability and non-refundable. Another important change to the child tax credit concerns the phaseout thresholds, which will increase from $75,000 to $200,000 for individuals, and from $110,000 to $400,000 for couples filing jointly. This allows more families to claim the child tax credit.

Keeping up with the integration of the tax bill into the tax code requires diligence and understanding. We recommend that you review with your accountant how these changes will impact your return this year, and in the years to come. We also recommend that you discuss with your financial advisor how these changes will impact your estate planning, tax planning and overall financial strategy, because as the tax landscape changes, new opportunities and liabilities are likely to arise.

For more information, visit waldronprivatewealth.com.