It is January 2018 and the new federal tax law is in effect. While there was much chatter in the last few weeks of 2017 about possible steps to take before the end of the year, it is time to move on and determine what effects the new law will have on you. Here are some areas that you may want to examine.
Higher standard deduction – The standard deduction is the dollar amount that you can deduct from your income to determine an amount on which your income tax is calculated. You choose either itemized deductions or the standard deduction based on which provides you a better outcome. With a higher standard deduction you may find that you use the standard deduction even though you itemized your deductions in the past. Before you get too excited, it is important to note that Personal Exemptions were eliminated by the tax act. Both the increased standard deduction and the elimination of the personal exemptions are scheduled to sunset in 2025.
State and Local Tax deduction – While there was quite a bit of debate regarding the proposal to eliminate the deduction for state and local taxes on your federal income taxes, the final tax law still allowed a deduction for state and local property and income taxes but only up to a $10,000 cap. This can have a significant effect on taxpayer with property in states with high property taxes.
Mortgage interest deduction – The ability to deduct mortgage interest remains however it is subject to a limitation of $750,000 of home acquisition indebtedness. Loans that existed prior to December 15, 2017 are grandfathered with the $1,000,000 limitation on indebtedness for the mortgage interest deduction. And there are few other circumstances in which a transaction that what in process may qualify for the old $1,000,000 limitation. Another important factor regarding the deductibility of home loan interest is that loan interest on home equity loans is no longer deductible – and not subject to grandfathering. This is important for those who planned to borrow against home equity to fund other needs such as education or starting a business.
529 accounts – The Tax Cuts and Jobs Act of 2017 changed the rules regarding funds from 529 plans. Tax-free fund distributions from 529 plans can now be used for qualified expenses related to private elementary and secondary schools in addition to college expenses.
Changes to the Alternative Minimum Tax (AMT) – The AMT was not truly repealed. However, changes to the exemption amount together with changes in the phaseout of the AMT exemption and the reduction in miscellaneous deductions, mean that far fewer people will be subject to the AMT.
These are just a few of the changes in the recent tax legislation that may affect you and your financial plans. Consult your tax accountant for specific information regarding your situation and consult your financial adviser to make any necessary adjustments to your financial plan.