Very early on when the House first began working on a new tax bill, it was feared that the mortgage interest deduction would get the ax. Mortgage interest is a highly protected tax provision backed not only by mortgage lenders, credit unions and banks but more importantly by the powerful real estate lobby. Mortgage interest did survive the cut but did reduce the current cap from $1 million to $750,000. Beginning in 2018, homeowners will be able to deduct the interest paid on mortgage loans up to the new $750,000 cap. Note, this is for new mortgages taken out in 2018. None of the new tax provisions are grandfathered.
SALT – State and Local Tax
The state and local tax deductions will be affected, sometimes referred to as SALT. Today, taxpayers who itemize can deduct state and local taxes paid from their taxable income. States with the highest state and local tax rates aren’t as pleased with this section of the new code and states without an income won’t pay much attention to SALT. This tax break was the most contentious of the various proposals as it pitted high-tax states against no/low-tax states. A compromise was reached allowing taxpayers to deduct up to $10,000 in state and local property taxes from taxable income.
The final bill largely left capital gains alone. Taxpayers will still be able to exclude up to $500,000 ($250,000 for single filers) from cap gains tax when they sell as long as they have lived in the property for at least two of the previous five years.
Every tax bracket saw a decrease for 2018. The Administration wanted early on to reduce the number of tax brackets from seven to just three or four. Taxpayers could then file their taxes on a form “about the size of a postcard.” While there was no postcard type change, tax rates were. The lowest rate of 10 percent did not change from 2017 to 2018. Rates changed from 15 to 10, 25 to 22, 28 to 24, 38 to 35 and the top tax bracket of 39.6 to 37. Here is a chart showing the new rates beginning next year.
|Tax Rate||Income Range for Individuals||Income Range for Married Joint Filers|
|10%||$0 – $9,525||$0 – $19,050|
|12%||$9,526 – $38,700||$19,051 – $77,400|
|22%||$38,701 – $82,500||$77,401 – $165,000|
|24%||$82,501 – $157,500||$165,001 – $315,000|
|32%||$157,501 – $200,000||$315,001 – $400,000|
|35%||$200,001 – $500,000||$400,001 – $600,000|
|37%||$500,001 and Up||$600,001 and Up|
Corporate Tax Credit
Another controversial proposal cuts the corporate tax rate. The President’s agenda included significantly lowering the corporate tax rate to keep corporations from locating overseas in lower tax countries. The President originally proposed a 15 percent corporate rate, down from the current 35 percent. The new rate settled in at 21 percent and is to take effect upon the President’s signature. While not at the 15 percent goal set by Trump, it is still a significant drop.
Home Equity Line of Credit (HELOC)
This is a new change to the tax code. Homeowners with HELOCs have in the past been able to deduct the interest from a HELOC in the year paid. But a new change in the 2018 code going forward eliminates that tax deductibility if the loan wasn’t used to acquire the home. Up until the end of this year, homeowners with a HELOC can deduct interest on up to $100,000 of HELOC debt. For new HELOCs funded as of January 1, 2018, this deductibility will be gone. Existing HELOCs will still have interest paid in 2017 eligible for a deduction but not in 2018 and beyond.
Child Tax Credit
Both sides of the aisle had wanted to increase the amount of the child tax credit, currently at $1,000 but this credit did little for lower income households who do not itemize their deductions. The new credit was doubled to $2,000 and a provision was made to allow for a household to apply for a $1,400 tax refund.
Every filer takes the standard deduction. It’s one of the first lines completed on the income tax form. In 2018, the standard deduction will increase from $6,500 for individuals to $13,000. Family households will see their deductions rise from $13,000 to $24,000. For many, this represents the largest tax cut in the entire package and in most cases will offset the SALT adjustments.
One of the key ingredients in the original Affordable Care Act, or ACA, is the individual mandate. The ACA required individuals to buy health insurance. Once thought to be the most controversial of the various tax proposals, the individual mandate interestingly faced little resistance. There was more back and forth going on with SALT and the corporate tax rate than the removal of the individual mandate. This proposal won’t be phased in until 2019.