Two major pieces jump out. One of which is that there is now a limit on your deductions for your State and Local Taxes. They use to be unlimited and now there is a limit.
Another of the other major changes that we will go through in detail in this Blog is regarding the changes on the Home Equity Loan. Do pay attention to these changes as they can affect you personally.
State and Local Deductions
Previously, taxpayers could itemize the taxes that they paid for State Income Tax, real estate and local property taxes, which may include sales taxes. Those deductions are often referred to as the SALT Deductions.
Now the Deductions are capped at $10,000.00. That will have a huge impact on people who pay very high State Income Taxes and/or very high Real Property Taxes.
Specifically those taxpayers who live in very expensive areas suddenly have a much higher tax bill.
Previously, taxpayers could itemize and deduct interest payments on new mortgage debt up to $1.1 million dollars. They could also deduct up to $100,000.00 on Home Equity Loans. Under the new law the mortgage deduction limits drop to $750,000.00 for new mortgage debt. Also, now the taxpayer can NOT claim the deduction on Home Equity Loans. This is a major change. Many people took Home Equity Loans, as opposed to a regular loan, because they could deduct the interest payment on that Home Equity Loan. That interest payment deduction has now disappeared.
Medical Expense Deduction
Previously, taxpayers who itemized their taxes could claim a deduction for their medical expenses that exceeded 10% of their Adjusted Gross Income.
Under the new law taxpayers can now claim a deduction for their medical expenses that exceed 7.5% of their Adjusted Gross Income for 2017 and 2018. Strangely this new deduction level ends on January 1, 2019.
Limits on Itemized Deductions
Previously, Itemized deductions could be reduced or limited, if your Adjusted Gross Income was over a certain high amount. That limitation on deductions has disappeared.
Capital Gains Tax Rates
There are no changes in the Capital Gains Tax Rates. Capital Gains are the profits realized from the sale of an asset, such as a Stock or Real Estate. There was some hope that those rates would be lowered or fear that the “Step-up in Basis” would be lost.
The “Step-up in Basis” is an valuation on property after someone passes on. For example, if mom and dad bought $50,000.00 worth of Walmart Stock and later it is worth $250,000.00 they could have a Capital Gains Tax on the sale of the $200,000.00 above the $50,000.00 originally paid, if they sold that stock. However, if they owned that stock at the time of their passing, their family can inherit that stock and sell it at the $250,000.00 Date of Death Value without paying any Capital Gains Tax.
Estate Taxes are taxes that the Federal Government may tax at a top rate of 40%, if the inheritance that mom and dad leave was more than $5.49 million dollars. That number could be doubled for couples if certain tax planning was done.
Under the new law, the top tax rate of 40% will only apply to estates valued at more than $11.2 million dollars, or $22.4 million for couples taking action with Estate Tax Planning.
This may have a big impact if there are a lot of family assets that are passed on when mom and dad pass on.
Estate Taxes can be planned around.
529 & College Accounts
These are State sponsored Non-taxed College Investment Accounts. They can grow untaxed based upon the investments. You can now put in up to $10,000.00 per year.
Qualified Retirement Accounts that are qualified keep their same deductibility.
We will look at more Income Tax Changes that may affect your family further along in other blogs. Do stay tuned.
The new Tax Code preserves all major charitable donation deductions with the exceptions of a few specifics (such as payments made in exchange for college athletic game seats).
Tax Reform Act ends or “Sunsets” in 2025. This is due to the “Byrd Rule”. This is not a permanent Tax Bill and must be passed by 60% of the Senate. Rarely does any political party have 60% of the Senate in current times.
The results of these changes will expire and the previous Tax Code will be in effect unless laws are not renewed or rewritten into another version.
The new rules were signed into law on December 20, 2017. It’s unsure as to how they are going to be implemented. People in very high property States with very large residences, including California, New York and Connecticut, did prepay real property taxes for 2018 in the year 2017. The IRS has said that they may not allow that to be deducted in 2017. We will see where that lands.
These changes to the Tax Code are expected to reduce Federal Tax Revenues by an estimated $1.46 trillion dollars over ten (10) years.
We will always watch to see innovative ways that Tax Professionals try or limit exposure under the New Tax Rules.
At the Law Firm of Steven Andrew Jackson, Attorney and Counsellor at Law, we have helped hundreds of families protect themselves and their loved ones, avoid Estate Taxes and Probate Costs, and keep their Estate Plans current with the law through The Customized Protective Estate Planning Solution™.