It’s the beginning of crunch time for taxpayers and their accountants. The tax filing season is now underway, and to add spice to the tax preparation mix, we have a whole new set rules to follow. I thought this would be a good time to review some of the changes.
Lower Tax Brackets
Most individual taxpayers will fall into lower tax brackets. The percentages for the 10% and 12% brackets didn’t change, but the ones for 25% and 28% are now 22% and 24% with slightly different income levels. The top brackets were also lowered with the highest bracket now at 37% for people earning half a million dollars or more per year.
New Standard Deduction
Homeowners across the United States will have several new tax options to consider. One of the biggest is whether to itemize deductions as we have in the past. The new standard deduction is almost “twice” what it was before, so it might provide a bigger tax savings than itemizing. It’s now $12,000 for an individual instead of $6,500 and $24,000 for a married couple — up from $13,000.
Mortgage Interest Limits
Tax experts say many people will choose the standard deduction because of new limits on other deductions, such as the popular mortgage interest deduction. The new rules limit the deduction for mortgage debt to $750,000 — down from $1 million. That only applies to loans that originated on or after December 14th, 2017. Existing loans are grandfathered into the old rules for deductions.
Interest on loans for second homes can be deducted but is limited to the $750,000 mortgage debt limit for both primary and secondary homes. Interest on home equity loans can be deducted but only if the money is used to substantially improve the property. As for mortgage insurance premiums, they are still deductible for 2018 taxes.
SALT Deduction Limits
The amount a homeowner can deduct for state and local tax has been reduced to just $10,000. That’s a big take-away for homeowners with multi-million-dollar home loans in high-tax states. If you have suffered an uninsured personal loss of some kind, like a theft, you can no longer deduct those losses unless they are due to a federally declared disaster.
Personal Exemptions – Gone
Personal exemptions for the tax filer and family members are no longer allowed, which greatly reduces the benefit of the new standard deduction. Under the old law, a person could take a standard deduction of $6,350 and a personal deduction of $4,050 for a total of $10,400. The new standard deduction is $1,600 higher so it will save you more in taxes, as an individual.
If you file as a family, with a spouse and children or other dependents, you will lose the benefits of the personal deduction. That adds up to $16,200 for a family of four, in addition to the standard deduction for the tax filer.
The loss of the personal deduction is subject to income limits, however, so that may still provide some families with tax savings. A higher child tax credit could also partially offset any lost deductions. It’s now $2,000 per child, or double what it was before.
Medical expenses can also be deducted if they exceed 7.5% of your adjusted gross income. That’s a much better starting point than the previous 10% floor. So people with a lot of medical expenses will benefit from that.
A few other things you can no longer deduct include moving expenses. You could previously deduct them even if you didn’t itemize. Full-time employees also have fewer deductions. They can no longer deduct unreimbursed business expenses like union dues, continuing education classes to upgrade career skills, license fees, and tax-preparation fees. These were previously allowed if they added up to more than 2% of your adjusted gross income.
If you are self-employed, you can still deduct business-related expenses including those related to having a home office, but the rules have changed for meals and entertainment. Entertainment costs are no longer allowed, but the deduction for 50% of your business meals are still okay.
Real Estate Provisions
There are many provisions that are particularly good for real estate professionals, including the new rule that gives pass-through entities, like LLCs and independent contractors, a 20% tax rate. Many realtors, agents, and landlords operate their businesses as LLCs. They can now lower their tax rate to just 20%, up to an income of $157,500 for individuals and $315,000 for couples.
The bill limits those who qualify for that pass-through rate to “non-personal service businesses” in the fields of health, law, consulting, athletics, financial services, and brokerage services. There were previous concerns about how that relates to real estate professionals, but it was officially determined that “brokerage services” do NOT apply to agents and brokers.
At-Risk Deductions that Survived
A few things that were at risk of being eliminated but were preserved in the final rules include the exclusion on the gain from the sale of a principal residence, student loan interest, and the highly revered 1031 exchange.
There are many other details in the new tax code that may or may not apply to you. This podcast was meant as a “heads-up” review. Please consult your tax accountant for rules regarding your own special circumstances.
The National Association of Realtors provides more details in a summary of the new tax rules for homeowners and real estate professionals. See link below:
Tax Reform: National Association of Realtors