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2018 Tax Reform: Truths, Myths and the in-between

The Tax Cuts and Jobs Act of 2017 (known in the business as H.R 1) is a somewhat sweeping revision of the tax code that will impact most every tax payer in how they file and plan but not necessarily everyone in terms of how much tax they pay. Anything as byzantine and at times contradictory as the IRS tax code could not possibly benefit all groups; some will benefit but at the expense of others. In this regard, it is nothing new under the sun.

But while you may not be so fortunate as to forever taken to filing all of your taxes on a postcard (a small portion of the tax paying populace can lay claim to that), the new law offers some simplicity. But, here again, the cost of that simplicity may be more taxes. Does all of this sound very generic and generalized? Perhaps. But the fact of the matter is that each situation is different, and applying your particular set of circumstances to the law with a clear determination of whether it’s “good or bad” for you is not a simple proposition. Think of it as the tax version of Newton’s Law - for every action, there is a reaction. It just depends if the reaction for you is good, or bad.

Here are a few important features of the new law that may pertain to you (and certainly do to many taxpayers):

MORTGAGE INTEREST:  The interest deduction on mortgages obtained in 2018 is now subject to a $750,000 limit, down from the previous $1,000,000. Any mortgages obtained prior to December 31, 2017 remain subject to the previous $1,000,000 limitation as well as any mortgage where the taxpayer had a written commitment obtained prior to December 15, 2017, if the loan closed by April 1, 2018. It is anticipated that the new Form 1098 will contain this information, but the IRS has not yet released the new 2018 form.

The next major change impacts home equity loans. Under prior law, a taxpayer could deduct the interest on equity loans if the total loan did not exceed $100,000. IMPORTANT: Now the interest on a home equity loan is only deductible if the proceeds of the loan were used to buy, build or improve the residence. If the proceeds were used for any other purpose, it is not deducible. This applies to existing home equity loans and there is no relief for taxpayers that have existing loans if they used the proceeds of those loans for other reasons such as education expenses, a car purchase, vacations or to pay off credit cards. Any mortgage that is refinanced after December 31, 2017 is also subject to the new rules. Accordingly, a refinanced loan cannot exceed the new $750,000 limit and if the taxpayer refinances more than the existing balance on the old mortgage, any proceeds obtained must be used to “substantially improve the home.” Any portion of a mortgage that exceeds the $750,000 limit or otherwise is not used to purchase or improve the home, will no longer be deductible.

THE NEW CHILD TAX CREDIT:  The new Child Tax Credit has many differences from the previous credit.

1. The maximum amount of the credit has doubled from $1,000 to $2,000 for each qualifying child, age 16 or under claimed on the tax return. To receive any part of this credit a taxpayer must have at least $2,500 in earned income (it was $3,000 previously).

2. To be eligible for the $2,000 Child Tax Credit, each qualifying child, age 16 or under, must have a valid Social Security Number. A child with an ITIN or ATIN will no longer qualify for this portion of the Child Tax Credit.

3. The new Child Tax Credit will phase out when the taxpayers’ AGI exceeds $400,000 for MFJ and $200,000 for all other filing statuses. The new phase out limits are significantly higher than the previous limits and will greatly expand the number of taxpayers eligible for the Child Tax Credit.

4. The refundable portion of the Child Tax Credit has been increased to a maximum of $1,400/per qualifying child, age 16 or under. The actual amount of the credit that a taxpayer can receive is based on 15% of taxable income above $2,500.

5. A new provision to the Child Tax Credit allows taxpayers to receive a non‐refundable $500 credit for a dependent who does not otherwise qualify as a qualifying child. This $500 credit will also be available to taxpayers who have a qualifying child that is age 17, 18, or a full-time student age 19 to 24. To receive this non-refundable $500 credit, the qualifying relative or child does not need a valid social security number, but may use an ITIN or ATIN if they are a resi‐ dent of the United States.

6. The $1,400 refundable amount will be adjusted in future years in increments of $100. For many taxpayers, the new Child Tax Credit will be a significant benefit and will more than offset the impact of the loss of the deduction for the personal exemption.

MISCELLANEOUS ITEMIZED DEDUCTIONS: The following miscellaneous itemized deductions will be discontinued:

• Tax Preparation Expenses

• Hobby Expenses

• Gambling Losses

• Investment Interest

• Unreimbursed Employee Expenses such as uniforms, education expenses, union dues

More detailed discussion of some of these changes can be found in our Newsletter Archive - find it here!!

And stay tuned as IRS continues to offer additional clarity and we get a better handle on how these changes affect you. We'll do our best to keep you posted.

Your tax withholding under the new tax law

With the myriad changes implemented under the new tax laws for 2018, checking under the hood on your tax withholding is more important than ever. While some may be having too much tax withheld, others in different situations may end up coming up short. Take a look by clicking below to see if you should make any changes or stay the course.

Wayfair vs South Dakota

The Supreme Court has spoken in the case of Wayfair vs South Dakota. The ruling effectively overturns Quill vs North Dakota (1992) which held that states could not compel retailers and other sellers to collect sales taxes from customers if they did not have a physical presence in their state. The court said the Quill law was “unsound and incorrect” given the present size and influence of internet commerce. The ruling puts the determinations as to what is required back in the states laps.

From a practical perspective, collecting and administering taxes to every online seller is daunting at best and darn near impossible at worst. Will buyers from foreign sellers, who would not be compelled under this law, be expected to remit the taxes to their state agencies themselves? How much investment in technology and personnel be required by both the sellers and the states to enforce the law? The answer is...we don’t really know. But this we can count on: politicians of all stripes and parties prize almost nothing (aside from your vote) more than revenues to deploy. Which means, if there is a will there is a way. Look for most states to eventually apply some sort of requirement, details and hiccups be damned.