The 2018 Tax Overhal

The 2018 Tax OverhaulThe last major tax overhaul occurred some 30 years ago. The new sweeping changes are an effort to simplify the income tax code while at the same time stimulate the economy. Both the House and the Senate have signed the bill and is on its way for a final signature from the President. The new tax law will take effect beginning calendar year 2018. Let’s take a closer look at what the new tax provisions will provide, who it impacts and what you can do now to help prepare for these new changes.

Mortgage Interest

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.

Capital Gains

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.

Tax Rates

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.

Standard Deductions

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.

Individual Mandate

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.

 

Sources: TaxFoundation.com, The Atlantic New, CPA Practice Advisor

 

8 thoughts on “The 2018 Tax Overhal

    1. Thanks, Mike – From what I hear the home “sale” rules will stay the same regarding capital gain exemptions ($250,000 per individual), however, there will likely be changes in the timeframe that you must own/maintain the home as your primary residence to 5 out of the last 8 years instead of the current 2 out of 5 years. Of course, we need to see the final signed bill before it becomes law.

  1. Thanks for the info. I am trying to ascertain if HELOC interest deduction is completely eliminated. Do you have any insight into that aspect of tax reform?

    1. Hey Marjorie – so, I have heard that HELOCs will remain the same, as a $100,000 threshold for non-improvements to the home. Meaning that the HELOC was a 2nd mortgage used to buy the home (purchase money 2nd) or cash for other related needs, anything besides home improvements (likely due to the write-offs with home improvements – rules looking out for double dipping tax write-offs). Of course, we need to see the final signed bill before it becomes law to know for sure, so more to come here.

  2. Hi Anthony,
    Quick two-part question on the 750k mortgage interest deduction. First, If I have a mortgage for 1 million will I get to deduct 75% of my interest or not at all? Secondly, Is it calculated on the original mortgage amount or on my current loan as I pay it down either through curtailment and or duration.
    Thanks, Dean

    1. Hi Dean,

      I’m anxiously awaiting the signing of the bill today, but as a proposed bill the 750k limits will only apply to newly purchased home loans. All existing loans will be subject to the 1M amount with an additional 100k for home equity loans.

      Also, home mortgage interest is computed based on the average current year loan value minus the limits that apply to that year. So, Grandfathered 1.1M loans will continue to be calculated at this higher amount unless something changes in the approved bill!!

      More to come once finalized signed into effect.

  3. Hi Anthony,

    To receive full tax deductions on mortgage interest does both husband and wife need to be borrowers on the mortgage?

    1. Typically not. As once married, you file jointly and that joint filing is how you grab the deductions.

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